Summary
- APTV has significant potential for growth and profitability, particularly in the growing electric vehicle and ADAS markets.
- APTV has issued robust guidance for FY30, with a revenue target of $40 billion and an EBIT margin target of over 17%.
- The EV/NTM EBITDA multiple is a cause for concern.
Thesis
Aptiv (APTV) is a provider of electronics, safety products, and electrical architectures for light vehicles. I believe investing in APTV offers a chance to take advantage of the most significant ongoing trends in the automotive sector, specifically the rising demand for electric cars and the growing adoption of active safety, autonomous driving, and connectivity features. I expect APTV's business segments to maintain their high quality, leading to above-market growth, as well as strong margins and returns that will further solidify their appeal to investors. In spite of this, EV/NTM EBTIDA is one metric that is preventing me from being completely bullish on APTV. The current multiple of forward EBITDA for APTV, 14x, is 40% higher than the company's 10-year historical norm. As a result, returns are restrained because of the looming threat of mean reversion.
Analyst day takeaway
For me, the most important thing I learned at APTV's analyst day was the potential for increased profits; specifically, that APTV expects its adjusted EBIT margins to rise to 14%-15% by FY25 and then to exceed 17% by 2030. Given the recent margin headwinds that APTV has faced, I believe the margin guidance is more encouraging than investor expectations. I believe that if APTV maintains its historical average incremental margins of around 20% based on its 2023 guidance midpoint, this would translate to estimated EBIT margins of approximately 12-12.5% for 2025, taking into account its new revenue guidance. As such, it is important to note that factors such as net performance and supply chain improvements will play a crucial role in achieving the 14-14.5% target set by the management. Even more so for the forecast period beginning in 2030, I believe that the mix and a larger proportion of revenue coming from software will be a significant contributor to margins. In my opinion, the future of APTV stock will hinge on whether or not investors believe the company can meet its margin targets.
Portfolio innovation
Increased high voltage capabilities are at the forefront of APTV's efforts to diversify the company's product offering in the field of electrical architecture solutions. As a result, APTV has widened its electrification product line and is confident that its cutting-edge hardware architecture will allow automotive original equipment manufacturers to realize significant efficiencies. Overall, management believes that its Signal and Power Solutions segment can offer 3x the addressable content for an electric vehicle, compared to a similar ICE vehicle, through a combination of increased feature penetration and portfolio expansion. As such, management believes it can increase its market share in the EV sector, citing the fact that its content is installed in only about one in every 3.5 vehicles manufactured overall but in about one in every two BEVs.
In my opinion, and from what I've heard from management, there are ways to increase the amount of content installed in each vehicle. For instance, management brought up the idea of high voltage busbars, which allow for compact packaging of high-power electronics both inside and outside the battery pack. As electric vehicle OEMs work to improve battery efficiency, I think that a lightweight, cost-effective ANET design will become increasingly important.
ADAS
Among the growth strategy APTV has laid out, the most prominent is the provision of active safety modular solutions that, according to the company, can assist OEM in developing autonomous systems at a range of different levels of autonomy. APTV's success in launching 10 L2 ADAS solutions with 8 OEMs bodes well for the product's potential to satisfy consumers. Moreover, APTV has been recognized for its Gen 6 ADAS platform, which offers the same or better performance at a cost that is 25% lower than that of a comparable vision-based system, according to the company. As such, I think this will continue to be one of APTV's fastest-growing markets in the years to come.
FY30 guidance
In my view, APTV has issued a robust FY30 guidance, which aims to achieve revenues of $40 billion. This target is underpinned by several factors, including strong bookings momentum, fundamental changes within the industry, and the company's position as a comprehensive provider of hardware and software solutions. While I am positive on revenue guidance, I have more confidence in APTV objective of achieving an EBIT margin of over 17% in FY30, given the potential for significant margin increases from its SVC offerings, the continued ramp-up of its software business, and the shift in its S&PS segment towards higher-margin engineered components.
Conclusion
In conclusion, APTV's analyst day provided valuable insights into the company's potential for growth and profitability. APTV focus on high-voltage capabilities and electrical architecture solutions for electric vehicles, as well as its strong presence in the ADAS market, positions it well for future success. While margin guidance is encouraging, and the potential for increased margins from its SVC offerings and software business further solidifies its appeal to investors, the EV/NTM EBITDA multiple is a cause for concern.
For further details see:
Aptiv: Be Careful Of Multiples Mean Reversion