The shares of this company should benefit from the…
Every time you get in a car or truck, there’s a good chance you’ll come into contact with a product made by Aptiv (APTV).
It’s the Aptiv software that sends the alert when you’re too close to another vehicle, and it powers the lane departure radar that prevents you from drifting ahead or into another driver. And it’s Aptiv that provides the electrical distribution system and high-voltage connectors that help power your electric vehicle.
And yet, at a recent price of US$110, Aptiv shares are trading at a 24% discount to Morningstar’s fair value estimate of US$141 per share.
“As far as stocks go, this is one of the best stories on the street,” said Morningstar senior equity analyst Richard Hilgert. “Now is the time for investors to look to Aptiv. It rarely trades below our fair value estimate and historically has always traded in a 2-star range.”
Hilgert estimates Aptiv’s average annual revenue growth at 12% per year between 2019 and 2026. Its earnings before interest, taxes, depreciation and amortization, or EBITDA, of 16.5 is one of the best in the industry. Aptiv’s ROI is between 10 and 20 years and is also among the highest in the group.
“It has the highest growth rate of any vendor,” says Hilgert.
Aptiv works with more than 20 global automakers and stands to benefit from megatrends driving industry change as auto and truck manufacturers race to deploy the next generation of greener, smarter, and safer fleets. The good news for investors: while consumers are demanding these changes, many of them are the result of government mandates.
Morningstar Sustainalytics assigns a low ESG risk rating to Aptiv based on environmental, social and governance factors and considers it to have a low level of controversy. The company is very attractive for funds that follow ESG and impact strategies.
Undervalued amid improving fundamentals
Hilgert gives Aptiv a narrow Morningstar Economic Moat rating, noting a product pipeline filled with intellectual property and its ability to bring new technologies to market. He also points out that the company’s “stable market share” is supported by close customer relationships and long-term contracts.
“We expect Aptiv’s average annual revenue growth to exceed average annual growth in global light vehicle demand by 8 to 10 percentage points,” Hilgert notes. “Aptiv’s ability to consistently innovate and bring new technologies to market drives sales growth, margin and return on investment.”
In mid-April, Aptiv was identified as one of 119 U.S.-listed companies considered undervalued in Morningstar’s coverage area of 866 companies that saw their fair value increase by at least 10% based on improving fundamentals despite a challenging operating environment.
Aptiv’s first-quarter revenue also beat expectations, coming in at $4.18 billion, 4% higher than the year-ago period. The revenue growth is 11 percentage points higher than the 7% drop in customer-weighted global light vehicle production. Squeezed by lower production levels and inflationary pressures, the operating margin of 7.8% was down from 11.8% a year ago.
An even more encouraging sign: Aptiv management is sticking to its full-year 2022 sales guidance of $17.75-18.15 billion, earnings per share of $3.90-4.80 and an operating margin of 9.9% to 11.2%.
“They’re enjoying one of the strongest secular tailwinds,” says Quoc Tran, president and chief investment officer of San Rafael, Calif.-based Tran Capital Management, which manages $1.2 billion. It underlines the rapid transition in the world towards the production of battery electric vehicles.
Tran says Aptiv has content in one out of 3.5 low-voltage vehicles and one out of two battery electric vehicles launched between 2020 and 2022. He notes that the dollar value of content in battery electric vehicles is 2 .5 times higher. of vehicles equipped with traditional combustion engines.
The Wind River-based company’s planned $4.3 billion cash acquisition from private equity firm TPG, which is expected to close in mid-2022, should also strengthen its competitive position, particularly with self-driving vehicles.
Is Aptiv a good stock to buy?
Motional, its 50/50 self-driving joint venture with Hyundai, also adds to the potential value of Aptiv’s shares. (HYU). Motional was formed for $4 billion in March 2020 and is now described by Tran as a hidden asset. Cruise, a self-driving car company backed by General Motors (GM)among others, received a $30 billion valuation following its latest round of funding.
If Motional were to have a similar price, that would value Aptiv’s stake at $15 billion, more than half of the company’s current market value.