2023-08-28 05:05:50 ET
Summary
- Aptiv PLC manufactures vehicle components and software.
- The company has made strategic acquisitions to expand its offerings and to capitalize on the electric vehicle megatrend.
- While APTV has achieved revenue growth and growing operating margin and should continue to do so, the stock already seems to be priced for the growth.
Aptiv PLC ( APTV ) manufactures vehicle components. The company seems to be set for a good growth run in revenues, but as the company's valuation seems to already price in a good amount of growth, I don't believe the stock is a fantastic investment at the current level. For the time being, I have a hold-rating for the stock.
The Company
Aptiv designs and manufactures multiple solutions addressing vehicles' different functionalities. The company has a wide range of solutions listed on the company's website:
Aptiv's Offering (aptiv.com)
The company has further refined its offering, as in 2022 the company acquired Wind River , a software developer in industries such as aerospace, telecommunications, and automotive, for $3.5 billion. The company also acquired a majority stake in Intercable Automotive Solutions, a high-voltage systems manufacturer, for 595 million euros or around $642 million. Aptiv doesn't seem to be a stranger to acquisitions prior to the examples, as the company seems to constantly complete smaller acquisitions with some larger acquisitions in between, as seen on the company's cash flow statement .
Aptiv's stock has had a good run on the stock market, as the share price has appreciated by 493% from 2011:
Aptiv Stock Chart (Seeking Alpha)
Financials
Unlike the company's share, Aptiv has a somewhat turbulent revenue history, as revenues are currently only near 2007 levels:
Although the long-term history seems quite bad, the company has achieved good growth when looking at a more recent history. For example, from 2015 to 2022 the company's compounded annual growth has been 7.0% . With the mentioned acquisitions that were made in 2022, Aptiv should achieve growth that's even higher than the mentioned rate - the middle point of Aptiv's current 2023 revenue guidance translates to a growth of 14.9%. Going further, the company sees that the electric vehicle megatrend should significantly boost the company's top line in the medium to long term, giving a basis for organic growth instead of the acquisition-fueled history.
Revenues tell a story about a company's scale, but investors should really only care about what's left after expenses - Aptiv has had operating margins ranging from a negative of -5.7% to a positive margin of 13.8% in its history:
The operating margin for the recent years has been below Aptiv's previous margins of over ten percent. The margin seems to be scaling back, though - the operating margin stands at 9.1% with trailing numbers, up from 2020's margin of only 6.2%.
Aptiv has communicated that it sees revenues of $40 billion and an operating margin of 17% by 2030 as plausible; electric vehicles becoming more common around the world boosts Aptiv's offering's demand dramatically. The operating margin rising into 17% would translate to a significant rise in Aptiv's earnings level, but I don't currently see a reasonable path into the margin - with trailing numbers, the company's gross margin is only at 16.5%, already below the mentioned operating margin. The revenue figure of $40 billion could in my opinion happen quite reasonably - the figure would mean a compounded growth of 10.9% from 2022 to 2030.
Aptiv's balance sheet has around $6.5 billion in long-term debt , of which $110 million is in current portions. The amount should be on a healthy basis, as Aptiv has a market capitalization of $27.6 billion and a net income that's nearing a billion dollars annually; with interest expenses guided at $285 million for the year, the debt doesn't take too big of a portion of the company's earnings in my opinion. On the other side of the balance sheet, Aptiv does hold $1.3 billion of cash, securing operations and further investments in the short term.
Q2 Earnings
Aptiv reported its Q2 earnings on August 3rd. The company achieved revenues of $5.2 billion, significantly above analysts' estimate of $4.86 billion . The company also had significantly better margins than expected, as Aptiv reported an EPS of $1.25 compared to an expected $1.02.
The quarter's growth was 28% from the previous year. Although some of the growth is due to Aptiv's acquisition, I believe the growth rate does represent the electric vehicle megatrend starting to pick up momentum; Aptiv should have interest times ahead.
The company's GAAP EBIT margin came in at 8.9% - the ramp up into 17% doesn't seem to be happening too quickly. The quarter's gross margin came in at 16.6%, making an EBIT margin of 17% quite hard to achieve.
Valuation
Throughout most of Aptiv's history on the stock market, the stock has seen an increasing forward price-to-earnings ratio, as the company began trading at a ratio of 6.43, rising into the current ratio of 18.74 with some turbulence in the 2020-2021 bull market:
I would attribute the growth in multiples to Aptiv's more nearing EV-induced growth - as electric vehicles should start to grow more significantly in volume in the current year, the company's growth should accelerate.
To get a deeper understanding of the stock's valuation, I constructed a discounted cash flow model. In the model, I estimate Aptiv to hit its revenue guidance of $23 billion to $24 billion in 2024, and $40 billion in 2030 - this translates into a slightly slowing growth after 2023, which picks up again in 2026 as EVs pick up attraction. After 2030, I expect Aptiv to achieve only slight growth, with the perpetual growth rate ending up at two percent.
Although I believe Aptiv's growth story into $40 billion in revenues, I proceed with caution concerning the operating margin of 17%, as the current gross margin wouldn't make the margin possible; I estimate Aptiv's EBIT margin to be 14.7% in 2030, after which the margin rises into 15.1%. This estimate already factors in a significant amount of further operating leverage.
These estimates along with a 13.29% weighted average cost of capital put the stock's estimated fair value at $83.90, around 14% below the current price:
DCF Model of Aptiv (Author's Calculation)
The cost of capital of 13.29% is derived from a capital asset pricing model:
CAPM Of Aptiv (Author's Calculation)
With Aptiv's interest expense guidance of $285 million for 2023, the interest rate with the current amount of long-term debt would be 4.40%, which I use in the model. As Aptiv leverages moderate amounts of debt, I estimate the debt-to-equity ratio to be 25% in the long term.
At the time of writing, the United States' 10-year bond yield stands at 4.24% . The used equity risk premium is derived from Professor Aswath Damodaran's July estimates . The beta of 2.03 is Yahoo Finance's estimate using monthly data from a period of five years. Finally, I add a small liquidity premium of 0.25% into the cost of equity, crafting a wide cost of equity of 16.49% and a WACC of 13.29%, used in the DCF model.
Takeaway
Although Aptiv will inevitably benefit from the electric vehicle megatrend, I do not believe the stock is necessarily a fantastic pick at the current price. With a DCF model downside of 14%, the stock market seems to expect a fast grow and widely expanding operating margin in the future; if the company achieves the long-term milestones, I would want a higher upside on my investment. For that reason, I have a hold-rating for the stock.
For further details see:
Aptiv: The EV Megatrend Is Priced In