Our current investment thesis is:
- Aptiv is positioned perfectly to achieve outsize growth, as it is heavily exposed to the EV and technology trends within the Automotive industry. Unlike many of its peers, the company provides highly complex solutions, allowing for greater differentiation to support the defensibility of its position.
- With scope for an improvement in growth and margins, we expect a downward pressure on Aptiv’s trading multiples. With only a small premium to its historical average and a moderate one to its peer group, we believe the business is attractively priced. Supporting this assessment is its attractive ~7% FCF yield.
Aptiv PLC (NYSE:APTV) is a global technology company that specializes in developing and manufacturing advanced vehicle components and systems for the automotive industry. Formerly known as Delphi Automotive PLC, Aptiv was spun off from Delphi Technologies in 2017. The company is headquartered in Dublin, Ireland, and has a significant presence worldwide.
Aptiv’s share price performance is respectable, returning over 100% to shareholders, although has broadly lagged the wider market. This is due to underwhelming financial improvements supported by a long period of strong returns. This is why its returns were good in the lead-up to 2022.
Presented above are Aptiv’s financial results.
Revenue & Commercial Factors
Aptiv’s revenue growth has been modest, with a CAGR of 3% into the LTM period. This includes the impact of acquisitions and divestitures, with its post-FY16 growth rate (following two material divestitures) being +7.6%.
Aptiv is a global technology company specializing in advanced solutions for the automotive industry, particularly in vehicle electrification, connectivity, and autonomous driving. The company’s business model involves developing and providing cutting-edge technologies and components to automakers for integration into their vehicles.
Aptiv offers a range of products and services, including electrical architecture, power and signal distribution systems, vehicle electronics, advanced safety systems, and autonomous driving solutions. The company has aggressively expanded its solution breadth, seeking to become the one-stop-shop for technological integration. Aptiv reports revenue in two segments “Signal and Power Solutions” and “Advanced Safety and User Experience”.
As the following illustrates, Aptiv has internally created or acquired a range of solutions, allowing it to leverage its brand and experience to increase its exposure to the industry.
This wide range acts to develop the wider Aptiv brand, providing confidence to automakers that Aptiv has deep expertise in the segment. Further, it allows for integration between solutions, streamlining the connectivity between them to enhance the value to automakers. Aptiv considers this a key selling point, believing they are the “only full systems solution partner”, positioning the company as a market leader in this space.
Aptiv is a global business, with revenue diversified almost equally between the Americas, Europe, and APAC. Underpinning this are “tech centres”, manufacturing facilities, and supplier relationships. This allows the company to reach all of the major automakers globally, with the operational capabilities to deliver consistent quality in a relationship-driven manner (not just exports from a US-central team).
The parts industry is extremely competitive, owing to the generic mass-manufactured nature of the majority of parts. This has encouraged many businesses to focus on more complex/niche parts, creating the scope for differentiation and higher margins.
Aptiv faces competition from various companies across different segments of its business. Key competitors may include Bosch, Continental AG, Magna International, and Denso Corporation. Competition is based on factors such as technology innovation, quality, and cost-effectiveness.
We believe new industry trends have the potential to significantly disrupt this industry, contributing to greater scope for differentiation and thus superior returns and barriers to competition.
- Electrification – The shift towards EVs has created significant opportunities for companies due to the requirement of advanced electrical systems and components. Aptiv has expanded heavily into this, developing a range of high-quality solutions. The EV transition looks to be a certainty due to government legislation globally, creating the potential for accelerated returns for Aptiv as production continues to increase relative to traditional ICE-powered vehicles.
- Autonomous Driving – The automotive industry is moving towards autonomous vehicles in conjunction with EVs, although the expectation is for this technology to become “mainstream” in the years after EVs are a mainstay. This is driving significant investment in ADAS and autonomous driving technologies, with Aptiv a leading player in this space. The opportunity within this segment is high, as there is the chance of a full fleet transition, or even just particular industries such as taxis, etc.
- Connectivity – Society as a whole is increasingly incorporating technology into every facet, with this trend impacting the automotive industry, also. Consumers are demanding in-car connectivity and technology-driven solutions, with scope for strong growth if new solutions and innovation can create value for consumers.
We consider these three factors to be the biggest trends impacting the industry, with Aptiv extremely well-placed to benefit from each trend. The company currently sees “Smart Vehicle Compute” and “High Voltage” to be the highest growth areas, with a CAGR of 28% and 20% respectively. Aptiv has a strong market share within these segments already, with a belief that its current positioning across segments will allow it to further gain in the coming years (2030 targets below). Based on this, we believe an increase in the company’s current growth rate is realistically achievable, with HSD/LDD possible into 2035.
Economic & External Consideration
The current economic environment represents a near-term risk to the company’s growth story, as consumers reduce big-ticket purchases as a means of protecting against higher inflation and elevated interest rates. The expectation is that this only headwinds linked to economic conditions, with no impact on the overarching trajectory of the EV industry, namely outsized growth and growing production. We concur with this, although should note that from observations of automotive retailers, other parts businesses, and automakers, we see a slowdown in the EV growth rate, which feels inevitable.
The following are key takeaways from the company’s most recent quarterly result:
- Revenue growth of +10.8%. This is driven by the Advanced Safety and User Experience segment, with strong volumes across regions. In conjunction with this, growth is healthy across sub-segments.
- $6.6b of bookings, representing a continuation of outperformance by High Voltage, Active Safety and User Experience. Economic conditions are seemingly not materially impacting the business, with its strong product offering sufficient to offset.
- Integration of Wind River and Intercable Automotive Solutions progressing well, with the Group ahead of schedule.
- Sequential supply chain improvements, with disruptions declining and the expectation for margin improvement.
Aptiv’s margins have declined noticeably in recent years, owing to supply chain pressures and the impact of the pandemic on the industry. We expect a considerable improvement incrementally in the coming years, as demand for its high-tech solutions continues to increase. OPM in the last 4 quarters is considerably higher than in prior quarters, implying the business is already beginning to experience this.
Balance sheet & Cash Flows
Aptiv’s balance sheet is relatively clean. The company is conservatively financed, with a ND/EBITDA ratio of 1.9x. Historically, distributions have been strong, with consistent buybacks and dividends. This has ceased post-pandemic, with an increase in capex spending and an erosion of margins. We suspect distributions will gradually increase, as margins appreciate and accelerated growth is achieved.
Presented above is Wall Street’s consensus view on the coming 5 years.
Analysts are forecasting a slight improvement in the company’s growth rate, with a CAGR of 8% into FY27F. Further, margins are expected to improve well, with EBITDA-M reaching 19% by FY27F.
We consider both factors achievable, owing to the company’s impressive innovation, strategy of supplementing organic operations with M&A, and industry tailwinds from the EV transition. Aptiv appears perfectly placed to ride growth from a parts perspective.
Presented above is a comparison of Aptiv’s growth and profitability to the average of its industry, as defined by Seeking Alpha (26 companies).
Aptiv performs exceptionally well relative to its peers. The company has achieved strong revenue growth across time frames, with the expectation for this to continue. Further, its profitability growth is substantially above average. Further, the company is more profitable than its peers, with a comparable FCF yield and slightly higher ROE.
We attribute its outperformance to the development of its product offering, allowing Aptiv to maximize its exposure to the industry tailwinds and develop relationships with leading automakers. Given this is a technology-led trend, we suspect its current position is defensible.
Importantly, Aptiv’s FCF margin is likely below average currently and its growth forecast is noticeably higher than its peers, implying its delta will positively widen in the coming years.
Aptiv is currently trading at 10x LTM EBITDA and 9x NTM EBITDA. This is a discount to its historical average.
A small premium to its historical average is justifiable in our view, as the company has done a fantastic job of developing its current business model for the industry tailwinds ahead that will drive growth. We believe Aptiv’s increased growth rate in recent years (HSD) is sustainable going forward, with scope for higher as the industry trajectory plays out.
Further, the company is trading at a premium to its peer group, with an LTM EBITDA delta of ~14% and a NTM FCF delta of ~29. Our view is that this is also justifiable. Financially, Aptiv has superior margins and growth to its peers, while also boasting strong commercial characteristics. We believe its strong IP and innovation will allow Aptiv to retain its competitive positioning.
Aptiv’s valuation has trended up in the last decade but importantly for us, its FCF yield has improved at a superior rate. With the business now yielding ~7%, we consider it a highly attractive investment.
Key risks with our thesis
The risks to our current thesis are:
- Interest rate environment – Elevated interest rates discourage large ticket purchases and can contribute to consumers “trading down”. An extended period of this has the potential to slow EV purchases.
- EV subsidies – China recently removed its subsidies for EV purchases, with the risk now that Western nations follow suit. Similar to the above, this increases the cost associated with purchasing an EV, leading to reduced demand.
- Demand slowdown – The EV trajectory is obviously unsustainable, with some suggesting we have reached the inevitable slowdown period. This will occur as the vast majority of those who want to transition will, with the remaining public likely awaiting the eventual forced transition (or will perpetually remain in the used car market).
Aptiv is a high-quality business. It has developed a broad range of solutions tailored to the technological development within the Automotive industry, which is a trend that is expected to continue in the coming decades. We believe Aptiv is one of the best-placed companies, with its acquisitive nature allowing it to tailor its portfolio to ensure its competitive position is protected.
From a financial perspective, Aptiv continues to grow well despite the market conditions, although margin improvement is paramount to improving its overall value proposition. At a NTM FCF yield of ~7%, however, we believe the stock is already a buy.