2023-11-22 03:04:46 ET
Summary
- Aptiv reported 3Q23 revenue of $5.114 billion, with growth in North America, Europe, and China.
- I believe the stock price drop is an overreaction.
- The slowdown in GOM was temporary and influenced by timing-related factors.
Overview
My recommendation for Aptiv ( APTV ) remains a buy rating, as I believe the market is overreacting to the weak headline figures. APTV bookings continue to remain healthy and on track to meet its FY23 targets, and the 2Y stack GOM remains strong. Note that I previously rated buy rating as I was positive about APTV’s ability to continue growing due to its positive inflection in Advanced Safety and User Experience [ASUE] and booking visibility.
Recent results & updates
APTV reported 3Q23 revenue of $5.114 billion, an increase of 11% y/y. By geography, APTV saw revenue growth of 2% growth over market [GOM] in North America, 4% GOM in Europe, and flattish GOM in China. By segment, Signal and Power Solutions sales of $3.68 billion were up 8% y/y, and within it, High Voltage was up 13% y/y. The highlight of the segment was that it was impacted by the UAW strike , which was a $70 million headwind. ASUE sales of $1.44 billion were up 20% y/y, and within it, Active Safety was up 30% y/y and User Experience was down 5% y/y. This segment was also impacted by the UAW strike, contributing $10 million in headwind. As a result, adjusted EBIT came in at $560 million, or 11% margin, which was a growth of $35 million vs. last year, but margin declined by 40bps.
I believe the stock price reaction was too much and was mostly driven by worries regarding the weak GOM metric, on top of the negative narrative of slower adoption of electric vehicles. The slow vehicle sales reported by TSLA was also another negative data point that drove the negative sentiment weaker.
While I agree that this is a concern, I think the stock price drop is an overreaction. First, the "slowdown" in GOM wasn't structural but rather optical and was mostly attributed to timing-related factors. If we look at GOM from a 2-year stack basis, 3Q23 performance saw a major outperformance compared to the previous 2 quarters, as shown in my chart below.
Author's valuation model
Second, the UAW strike was a drag on GOM's performance during the quarter. APTV suffered greatly because it was over-indexed by the Detroit 3 automakers in North America relative to the production of light vehicles worldwide. Thirdly, on a headline basis, while global GOM decelerated from 1000 bps in 2Q23 to just 200 bps in 3Q23, if we look at APTV exposures, there were spots where APTV was performing really well. For instance, in North America, 65% of APTV's revenue comes from the manufacturers in Detroit, and GOM was 1400 bps.
Finally, I believe that some investors may be missing the forest for the trees when it comes to the negative narrative surrounding weak EV adoption. Adoption of EVs is one of the growth drivers for APTV, but other growth drivers include the expansion of high-voltage vehicles in general, like plug-in hybrid electric vehicles and autonomous driving, and the need for increasingly complex electrical architecture for vehicles. Therefore, I wouldn't draw any firm conclusions about the future pace of growth from the headline data on weak pure-EV adoption.
Finally, I believe the current bookings and high growth segment momentum position APTV on track to keep delivering GOM in the coming years. In 3Q23, APTV reported $6.6 billion of bookings, bringing year-to-date total bookings to $27 billion, which is on track to meet the FY23 target of $32 billion if we annualize it ($27 * 4/3 = $36 billion). This $36 billion is roughly 1.7x FY24 consensus estimated revenue.
Valuation and risk
Author's valuation model
According to my model, APTV is valued at $107 in FY24, representing a 32% increase. My target price was lowered as I adjusted my assumptions to reflect the fact that EV adoption is actually slowing, which is bound to have an impact on growth. I also adjusted my margin expectations downward to be conservative on the margin expansion runway as growth slows. Lastly, my assumption for forward PE is also reduced to 16x, as I expect the market to focus on the negative headline numbers (slowing EV adoption and GOM deceleration). Note that APTV is currently trading at 14x forward PE while it has a 10Y average of 17.5x. My assumption is that multiples will see some recovery but remain pressured.
The investment risk with APTV is that I might have been too optimistic about the negative impact of slowing EV adoption. If the majority of incremental demand is going to come from EVs, then growth might see further deceleration.
Summary
Despite the recent market reaction to APTV performance, I maintain my buy rating on APTV. The downward shift in stock price appears exaggerated, primarily influenced by concerns over weaker GOM and EV adoption. My analysis reveals that the GOM slowdown was more temporary than structural, influenced by timing-related factors and the impact of the UAW strike. Furthermore, while EV adoption is a significant factor, APTV's growth drivers include broader aspects. The company's current bookings and momentum in high-growth segments remain promising, supporting the potential to meet FY23 targets.
For further details see:
Aptiv: Share Price Drop Is An Overreaction