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- Value Investor Daily #34
Value Investor Daily #34
Aptiv (APTV) Stock Looks Cheap to Management, Buybacks Accelerating
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Aptiv PLC (NYSE: APTV), a global leader in vehicle component manufacturing, has consistently outperformed EPS expectations over the past seven quarters.
Despite this strong performance, the company’s stock has dropped by almost 60% from its peak, making its current trailing twelve-month (TTM) price-to-earnings (P/E) ratio of 7.1 appear undervalued.
The stock price was here in 2015 when sales were half (~$10B) what they are now (~$20B). Analysts expect $29 billion of revenue by 2028.
Aptiv operates across North America, Europe, the Middle East, Africa, Asia Pacific, and South America, providing innovative electrical, electronic, and safety technology solutions for the automotive and commercial vehicle markets.
The company boasts impressive growth metrics, with a three-year compound annual growth rate (CAGR) of 13.2% in revenue, 16.8% in EBITDA, 78.4% in net income, and 24.3% in free cash flow.
Source: GuruFocus
Latest Earnings Recap
In its Q1 report released in May, Aptiv continued to beat EPS expectations, posting an EPS of $1.16, surpassing Wall Street analysts' estimates by $0.16.
However, revenue for the quarter was $4.9 billion, slightly below consensus by $90 million, marking a 1.7% year-over-year increase. The operating margin stood at 11.1%, outperforming the Street estimate of 9.9%.
Aptiv adjusted its full-year outlook, anticipating a 1% decline in global production due to reduced schedules from customers in North America and Europe.
Consequently, the company lowered its revenue guidance by $450 million, primarily due to a decrease in high-voltage revenue growth projections from 20% to 5% year-over-year.
In response, Aptiv is implementing cost-saving measures through engineering efficiency initiatives.
With the EV market favoring localized Chinese Original Equipment Manufacturers (OEMs), Aptiv's longstanding presence in China positions it well for growth.
The company boasts a $6 billion bookings backlog in China, with over 70% attributed to local businesses, up from 60% the previous year. Aptiv's revenue mix in China is currently 50% locally weighted and is trending higher.
Valuation and Analyst Sentiment
Wall Street analysts have an average Buy rating on Aptiv, with price targets ranging from $62 to $145 and an average of $102.41. This indicates a potential upside of 37%.
Following Aptiv's Q1 performance, analysts have revised their EPS forecasts for the upcoming quarter (Q2/24, scheduled to be released on August 1) from $1.34 to $1.42 per share.
Our fair value calculation, using multiple valuation models such as P/E multiples, EV/EBITDA multiples, and discounted cash flow (DCF) methods, estimates Aptiv’s stock at approximately $121, suggesting a potential upside of over 48%.
Management
Let’s look at how management has performed:
APTV | TTM | 5-Yr Avg |
|---|---|---|
Gross Margin | 17.76% | 16.35% |
Net Margin | 14.87% | 7.86% |
Return on Equity | 29.66% | 19.29% |
Return on Total Capital | 7.09% | 6.58% |
Cash from Operations | $2.15B | $1.45B |
Revenue Growth | 11.06% | 6.96% |
The company's results have improved over the last five years, but to achieve the recent gains, it had to take on additional debt—almost $7 billion now, up from $4.46B three years ago.
Source: GuruFocus
Management is taking advantage of the lower share price, purchasing over $950 million of stock in the last twelve months, up from just $36 million in 2022.
On the latest earnings call, CEO Kevin Clark said this about management’s view of the share price:
Lastly, we continue to believe that our stock is undervalued and presents an attractive opportunity to return capital to shareholders. As such, we're doubling our share repurchase target from $750 million to $1.5 billion during 2024.
So we’re looking at up to $1.5 billion of buybacks in 2024 vs. a current market cap of $20.48 billion, a buyback return of over 7%.
Conclusion
Aptiv has strong growth potential, particularly in the Chinese EV market.
Despite the recent stock decline, the company’s fundamentals make it a compelling investment opportunity if the EV cycle picks back up.
Do your own research and decide. Thank you for reading today!
Ready to revolutionize your workday with AI?
Discover the key to unlocking unparalleled productivity with HubSpot’s free guide to using ChatGPT at work. You’ll find practical insights, useful integrations, and 100 prompt ideas to help you unleash the power of AI for a more efficient, impactful professional life.