VC - Visteon: Remarkable Progress And Adaptability In Tough Environment

2023-09-11 03:31:19 ET

Summary

• VC's recent performance has shown enhancements in customer mix and strategic efforts to combat the semiconductor chip shortage.
• The company reported lower-than-expected earnings due to a product recall charge, but revenue increased by 18%.
• Visteon has secured new business contracts, particularly in its electrification business, and has the potential for further revenue growth and margin expansion.

Summary

Visteon Corporation (VC) supplies automotive systems, modules, and components to vehicle manufacturers and the aftermarket industries. I am recommending a buy rating as VC recent (2Q23) performance was good, in my view. In particular, it has shown enhancements in the customer mix, and strategic redesign efforts to combat the semiconductor chip shortage. In addition, management has proven their capability to successfully secure new business contracts, especially in its electrification business.

Financials / Valuation

VC has reported a lower-than-expected earnings performance in the 2Q of 2023. This was primarily due to an unusual charge related to a product recall, which, if excluded, would have resulted in earnings that exceeded initial estimates. In contrast, the company's second-quarter revenue showed a promising increase of 18% year-over-year, reaching $983 million through organic growth. This growth was driven by several factors, including a robust product launch schedule, favorable pricing dynamics, high demand for their digital cockpit products, and a substantial 12% year-over-year increase in customer vehicle production across all regions.

Considering VC's recent achievements in securing new business contracts, the successful execution of its electrification business strategy, and the ongoing development of its power electronics strategy, I have confidence in the company's potential to expand its current revenue growth rate.

In 2Q, excluding the recall charge, VC would have achieved an impressive margin of 10.7%. Despite the challenges posed by the semiconductor supply shortage, the company managed to enhance its margin through outstanding operational and business acumen. As a result, I anticipate further expansion of its EBITDA margins.

Currently, VC is trading at a forward EV/EBITDA multiple of 7.8x, which is at a premium to other global auto parts player like Lear Corp, Magna International, Bridgestone Corp, etc. Given the strengths I've mentioned, this valuation premium appears justified. Consequently, I see a potential upside of 27%. If Visteon can capture a larger share of the electrification TAM, I believe the market may assign an even higher multiple, further boosting its valuation.

Comments

I believe VC revenue performance might have been overlooked, as seen from the lacklustre share price reaction. Visteon's revenue could have been even stronger if it weren't for two significant challenges. First, the ongoing semiconductor shortage, particularly affecting microcontrollers used in certain digital clusters, hindered revenue growth. Second, there was a slower-than-expected increase in revenue related to battery management systems [BMS] during the quarter.

Another reason why the share price has not done well, I believe, is because 2Q EBITDA margin stood at 9.2%, representing a decline of approximately 100 basis points compared to the previous quarter. Again, this decline was primarily driven by a one-time charge of $15 million associated with the product recall. If I exclude this charge, the EBITDA margin would have been 10.7%, showing a 50-basis points improvement from the previous quarter. It's worth noting that the product recall incident only affected a limited number of units. This issue was identified during 1Q of the year and was promptly resolved in early Q2, with no long-term implications for the company's operations.

Despite VC weaker performance in the 2Q, I maintain a positive outlook for the 2H of the year. VC acknowledges that its customer portfolio currently lacks exposure to major electric vehicle manufacturers like Tesla and BYD. Consequently, the company is actively working to rebalance its customer mix, particularly in the Chinese market. Notably, last year saw a significant improvement in VC'S China customer mix, with 40% representing domestic OEMs compared to just 20% in the past. Moreover, 1H was hampered by the ongoing semiconductor chip shortage, particularly affecting microcontrollers. However, VC has initiated redesign efforts that should enhance its supply chain as they move into the 3Q and 4Q.

Additionally, the 1H witnessed the launch of 70 new vehicle programs, with two-thirds of these programs yet to occur and scheduled for the second half. Consequently, with an improved customer mix and a greater number of programs launch in the second half, I anticipate top-line revenue growth and also achieving mid-teens growth rates that surpass the overall market in 2H.

Overall, I am impressed with VC'S remarkable achievement in securing new business contracts. In the 2Q, they managed to secure approximately $2.5 billion in new business wins , bringing their year-to-date total to $4.0 billion. This is a substantial improvement compared to the same period last year when they secured $3.1 billion in new business. These wins have positioned the company for further enhancement of their second-half 2023 top-line revenue. VC's recent successes include winning a contract for an 8-inch digital cluster for a European two-wheeler OEM, which highlights their continuous momentum in the motorcycle market. Additionally, they secured several other significant contracts in the quarter, including one for a 20-inch V-shaped multi-display module with a European OEM, a 12.3-inch digital cluster display for a luxury brand of a Japanese customer, and an extension of a high-volume 12.3-inch digital cluster program in North America. These achievements underscore VC's strong position in the automotive display technology sector.

Among the impressive $4 billion in year-to-date business wins, I'd like to highlight VC's success in executing its electrification business strategy . Approximately 41% of these wins, equivalent to $1 billion in the 2Q, were related to electrification initiatives. Notably, in 2Q, VC secured its first-ever EV power electronics contract with a prestigious European OEM luxury brand. This contract involves the integration of VC's smart battery junction box with the OEM's battery management system. Additionally, VC was awarded the Cell Monitoring Controller component for the Battery Management System associated with this platform. I believe this accomplishment marks a significant milestone for VC as it marks the beginning of their power electronics strategy. Power electronics represents an opportunity for incremental content per vehicle for VC, further enhancing their offerings. The program is scheduled to commence in 2026, with the integrated system contributing over $700 per vehicle for new vehicle lines.

Risk & Conclusion

There are several potential risks to consider. First, global light vehicle production might track softer than expected, possibly due to factors related to the global economy, geopolitics, or unforeseen global health events. Second, the semiconductor chip shortage may persist beyond 2023, leading to limited availability of critical components required for some of Visteon's premium products. Lastly, global technology companies are increasingly interested in entering the automotive industry, focusing on technologies that enable connectivity and electrification. This could potentially introduce additional competition for Visteon in these areas.

In conclusion, VC has demonstrated resilience and growth potential despite facing challenges in the 2Q of 2023. The company's revenue increase of 18% YoY showcases its strength in the automotive industry, driven by strategic product launches, favorable pricing dynamics, and increased customer vehicle production. VC's ability to secure new business contracts and execute its electrification strategy positions it for future growth. Despite a temporary setback due to a product recall charge, VC's EBITDA margin improvement is noteworthy. While trading at a premium compared to competitors, this valuation appears justified considering VC's strengths, potentially offering a 27% upside. The company's efforts to rebalance its customer mix, supply chain improvements, and a robust pipeline of new vehicle programs in the 2H indicate a positive outlook.

For further details see: