VC - Visteon: Strong Growth May Lead To Better Returns For Investors

Summary

• VC is showing a solid expansion game through new products and services, greater customer programs, and stronger collaborations.
• Recent growth in the stock price has made the stock slightly overvalued.
• My rating for VC is Hold.

Visteon Corporation ( VC ) is experiencing rapid growth, with 2022 being its highest sales year to date. The company is currently expanding its reach through new customer programs and partnerships. It has a strong customer base, which has helped the company achieve a 200% increase in net income last year. However, the company's success is subject to macroeconomic conditions beyond its control. VC's current price-to-earnings (P/E) multiple is higher than the industry average, causing its stock price to exceed its intrinsic value. My initial rating for VC stock is Hold.

About the company

Visteon Corporation is a company that specializes in automotive technology and creates electronic and connected car solutions for car manufacturers all over the world. Some of their products include instrument clusters, which can be either analog or digital displays, information displays that incorporate different types of user interface technologies and graphics capabilities, and infotainment and connected car solutions. These solutions include Android infotainment systems that provide seamless connectivity and voice assistants with natural language understanding. Visteon also offers battery management systems, power electronics units, and telematics control units for secure connected car services, software updates, and data. Additionally, the company provides SmartCore, an integrated domain controller, SmartCore Studio, a configuration tool, and body domain modules, which integrate different functions into one device, such as central gateway, body controls, comfort, and vehicle access solutions.

Recent performance

Visteon Corporation had a highly successful year in 2022, with a 35% increase in revenue . Each quarter, the year showed stronger sales than the corresponding quarter in 2021. The company pursued business expansion through the launch of new programs and the extension of existing ones, and also introduced new products to its partners. Visteon Corporation partnered with Qualcomm (QCOM) to create its next-generation SmartCore system. The company's impressive growth was also reflected in its stock, which yielded a 40% return for investors within six months.

Strengths

VC is currently experiencing a significant upswing. As mentioned earlier, the company's revenue showed substantial growth, and its net income increased by over 200% since 2021. In just one year, the adjusted EBITDA increased by $120 million, which accounted for more than 9% of the total sales. These impressive figures indicate a strong growth trajectory for the company and suggest that this trend may continue in the future, especially as macroeconomic factors such as the shortage of semiconductors and the stabilization of the supply chain begin to fall into place.

In 2022, Visteon Corporation introduced new products and services, launched 45 new customer programs, and partnered with Qualcomm. These developments not only helped the company achieve success in 2022 but also have the potential to generate even greater sales in the years to come.

Visteon Corporation's global presence and strong customer base include prominent automotive brands like BMW, Volkswagen, General Motors, and Mercedes-Benz. The company's manufacturing and engineering footprint spans several countries, including China, India, Japan, Mexico, Portugal, and Slovakia. This global customer network and worldwide production footprint mitigate the risk of dependence on any particular economy or region and provide VC with abundant opportunities for growth. This also helps to minimize the risk of any restrictions on the company's growth.

The company's balance sheet highlights one aspect that strengthens it: its large cash and equivalents balance. Visteon Corporation's total cash position is $523 million , while its debt amounts to $349 million. This implies that the company has a negative net debt and a significant level of liquidity. The company's strong financial stability is reflected in its ability to easily pay off its debt.

Weaknesses

While being a worldwide corporation has its advantages for VC, there are also drawbacks to consider. Because VC is influenced by macroeconomic factors, it is susceptible to market risks and economic downturns. Growing interest rates could reduce people's disposable income, leading to a slowdown for the automotive industry and decreasing the demand for the company's products. Additionally, supply chain bottlenecks and product shortages exacerbated by lockdowns and sluggish exports from countries could hamper its growth in coming years. One such example is the situation faced in 2021 and 2022 where the shortage of semiconductors negatively impacted the automotive industry throughout the world.

Looking forward

An average value of $146 has been determined using the intrinsic valuation techniques of EV/EBITDA and P/E multiples. This is based on the following assumptions:

1. EV/EBITDA multiple for VC is 15.36x, which is higher than the sector median of 12.67x.

2. P/E multiple for VC is 37.5x, which is also higher than the industry average of 29.75x.

As the current stock price is $163.14, it is estimated that the stock is currently overvalued by 11%.

Conclusion

There are several positive aspects to this stock, such as VC's robust network, global presence, and recent growth over the past two years. The company's solid financial position and increasing net income also make it an attractive investment to consider.

However, the current overvaluation of the stock is a cause for concern. Additionally, the company's reliance on many macroeconomic factors and the overall uncertainty of the global market leads me to rate VC as a "Hold" for the time being.

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