Summary
- My prediction is that Aptiv's actual Q4 2022 EPS will fall short of the analysts' expectations.
- If one looks beyond Q4 2022, APTV's recent acquisitions should boost the company's financial performance in the medium term.
- I maintain my Hold rating for Aptiv, in view of both the potential fourth quarter earnings miss and the company's inorganic growth strategy.
Elevator Pitch
My rating for Aptiv PLC's (APTV) shares is a Hold. I previously reviewed Aptiv's financial performance for the second quarter of last year with my prior write-up for APTV published on August 16, 2022.
In the current article, I turn my attention to Aptiv's Q4 2022 earnings preview and the company's recent M&A (Mergers & Acquisitions) deals. I have a favorable opinion of APTV's inorganic growth approach based on my analysis of its recent acquisitions. But I am concerned that Aptiv's shares could suffer from a meaningful price correction, assuming that its upcoming Q4 2022 results disappoint the market. Given my mixed view of APTV, I keep my Hold rating for Aptiv unchanged.
Preview Of APTV's Q4 2022 Financial Results
Aptiv will announce the company's Q4 2022 earnings this Thursday on February 2, 2023, as per its press release issued in early-January.
In November 2022, APTV had guided for a revenue of $17.15 billion and a non-GAAP earnings per share of $3.30 (based on the mid-point of guidance) for full-year fiscal 2022. In other words, Aptiv is expecting to deliver top line and bottom line of $4,651 million and $1.16 per share, respectively in Q4 2022.
As a comparison, the current Wall Street analysts' consensus fourth quarter revenue and normalized EPS forecasts (source: S&P Capital IQ ) for APTV are $4,443 million and $1.18, respectively. This implies that the market is more pessimistic than the company's management in relation to top-line performance, but more optimistic when it comes to bottom-line expectations.
In my view, Aptiv's actual revenue for the final quarter of 2022 should come in line with the sell-side's expectations.
At the company's Q3 earnings briefing on November 3, 2022, APTV did mention that there could be potential "upside" relating to its Q4 2022 top line guidance relating to a better-than-expected recovery in "China." But Aptiv subsequently noted at the more recent Barclays (BCS) Global Automotive and Mobility Tech Conference on December 1, 2022, that its financial performance for Q4 2022 (up to end-November) "continue to be in line with what we talked about on our (Q3) earnings call", in response to a question on China.
Also, actual global light vehicle production numbers for Q4 2022 fell short of the market's expectations. As disclosed in automotive supplier peer Autoliv's ( ALV ) most recent quarterly investor call January 27, 2023, Q4 2022's worldwide light vehicle production turned out to be "slightly lower than expected" as compared to what the market had anticipated "in the beginning of the quarter" (Q4 2022).
In a nutshell, the analysts' consensus fourth quarter top-line estimate for APTV is -4% below management guidance, which should have already factored in weak global light vehicle production numbers and the lack of upside from the Chinese market.
On the flip side, I expect Aptiv's actual Q4 profitability and earnings to disappoint the market, when it reports its most recent quarterly financial results this Thursday. I take into consideration the fact that the sell-side's current consensus Q4 2022 bottom line projection for APTV is approximately +2% above what management had guided for.
There are signs pointing to weaker-than-expected profitability and lower-than-expected earnings for Aptiv in the fourth quarter of the prior year.
At the December 2022 Barclays Global Automotive and Mobility Tech Conference, APTV highlighted that "there's obviously inflation beyond (raw) material costs in the environment" which it is attempting to "deal with that through our improved performance." This means that although Aptiv is largely passing on raw material cost increases to its clients, the company is still negatively affected by higher operating expenses in other cost categories (e.g. labor) as a result of inflationary pressures.
Separately, a December 22, 2022 research report (not publicly available) published by JPMorgan ( JPM ) titled "Detroit Trip Takeaways" highlighted that a number of automotive suppliers had suffered from higher-than-expected costs in Q4 2022 due to a larger-than-expected increase in the number of client (auto OEMs) production disruptions. JPM's analysts had visited a number of automotive OEMs and suppliers (which didn't include APTV) in Detroit late last year; they found that most auto suppliers weren't able to make timely cost-cutting adjustments as they weren't given sufficient advance notice of their customers' production disruptions.
In conclusion, my analysis suggests that it is likely that Aptiv will report below-expectations Q4 2022 earnings on February 2, 2023.
Inorganic Growth Strategy
There is the potential for negative surprises when APTV announces its fourth quarter results this week, as discussed in the preceding section. Moving forward, Aptiv's inorganic growth strategy is a key thing to watch, assuming one looks beyond the current challenging operating environment in the automotive industry.
APTV outlined the company's inorganic growth strategy at its Q3 2022 investor call in November. Specifically, Aptiv stressed that it has plans to "grow the portfolio" with "bolt-on transactions" in "key growth areas." APTV's recent M&A transactions send the message that the company continues to execute well on its inorganic growth strategy.
On December 1, 2022, Aptiv revealed that it concluded the purchase of 85% of Intercable Automotive Solutions' shares to enhance its "capabilities to design and deliver fully optimized high voltage architecture solutions." Intercable is a leading player in the high-growth high voltage busbar market, so APTV's acquisition of Intercable will help to boost its revenue growth prospects. The global high voltage busbar market is projected to grow by a +30% CAGR between now and 2026 to around $4 billion, and high voltage busbars could translate into an incremental vehicle content opportunity of around $100-$200 for APTV as per management's comments at the Q3 earnings call.
APTV disclosed on December 23, 2022 that it has bought over Wind River Systems, a company whose "software platform" can be integrated with APTV "Smart Vehicle Architecture." This deal with Wind River could deliver substantial synergies. Aptiv mentioned at the Barclays investor event on December 1, 2022 that it had already been collaborating with Wind River prior to the acquisition, to identify a common group of targeted automotive clients which they intend to "jointly approach and work with to develop a system." Notably, APTV highlighted that there has been "positive work being done with several customers" as part of the earlier collaboration between both companies. As such, Aptiv's recent acquisition of Wind River puts it in a good position to capitalize on the growing "software-defined vehicles" trend in the industry.
Concluding Thoughts
I continue to rate Aptiv's stock as a Hold. On one hand, I am worried about the risk of negative earnings surprises in the very near term. On the other hand, I think that APTV's inorganic growth strategy is sound, judging by its recent deals.
For further details see:
Aptiv: Focus On Q4 Earnings And M&A Deals