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Aptiv PLC (NYSE:APTV) is well-known for its successful and game-changing acquisitions beginning in 2015 and for successfully overcoming the risk associated with its largest spin-off of its Powertrain Systems segment in 2017. From 2017 to 2021, the company successfully increased its top line by 43 percent to $15,618 million, outperforming its performance in both 2019 and 2020. Today, APTV completed its largest acquisition since 2017 and will expand market opportunities on both within and outside the automotive sector. APTV is a global leader in automotive technology and is well-positioned to meet the growing demand for electrification and connected services, enabling the company to create positive value for its shareholders and ensure a sustainable future. Despite its 26 percent decline from its all-time high, APTV remains risky due to its slowing bottom line, which results in an all-time low ROE with limited upside due to the stock’s high relative valuation.
2021 Investor Presentation (Aptiv.com)
Aptiv is trading in a growing connected car industry, which is projected to grow by 19 percent CAGR to $56.3 billion in 2026 from $23.6 billion. This is only one of the three identified megatrends by the management which are expected to grow exponentially. They are focused on three megatrends: ‘Safe,’ which aims to reduce the risk of collisions through innovative safety features; ‘Green,’ which aims to minimize carbon emissions from vehicles; and ‘Connected,’ which maximizes vehicle efficiency while integrating convenience and enhancing consumer experience. APTV plans to stay relevant in the market by enhancing their technological capabilities with their recent acquisition of Wind River in exchange for $4.3 billion in cash. The deal is expected to close by midyear 2022 and financed through a combination of cash and debt. It is also worth noting that they are planning for Wind River to operate as a stand-alone business under Aptiv. The management provided a positive outlook for new synergies with Wind River to cater their three megatrends, as quoted below:
Fully capitalizing on this opportunity requires comprehensive solutions that enable software to be developed faster, deployed seamlessly and optimized throughout the vehicle lifecycle by leveraging data-driven insights. These same needs are driving the growth of the intelligent edge across multiple end markets. With Aptiv and Wind River’s synergistic technologies and decades of experience delivering safety-critical systems, we will accelerate this journey to a software-defined future of the automotive industry. In addition, we are committed to further strengthening Wind River’s competitive position in the multiple industries it serves. We look forward to welcoming the world class Wind River team to the Aptiv family as we continue to develop a safer, greener and more connected world.
2022 Wind River Acquisition Presentation (Aptiv.com)
Their goal is to cater not only the connected car industry but to leverage on the connected intelligent systems across the industries, as shown in the image below.
2022 Wind River Acquisition Presentation (Aptiv.com)
This will increase APTV’s exposure in the Aerospace & Defense, Industrial & Medical, Telecom, and Automotive industries through Wind River and allow it to address the threat posed by the growing trend of insourcing software and engineering tasks. This move sounds great for APTV, however, Wind River doesn’t expect to provide the former a meaningful revenue until 2026. The management expects that Wind River will have $1 billion in revenue in 2026 and will contribute meaningful growth by the same year. One good catalyst about the acquisition is their expectation that around 40 to 50 percent of Wind River’s revenue will come from its studio subscription revenue, enhancing its future cash flow potential.
Aptiv is somehow having a hard time coping with the competition as one of its primary customers, Stellantis (NYSE:STLA), entered a multi-year partnership with Amazon (NASDAQ:AMZN) to create a customer-centric connected experience, with the goal of transforming STLA into the leader in software-driven mobility. APTV, in my opinion, will struggle to compete in a highly competitive market, particularly against STLA, which is valued better.
Despite the current headwinds, APTV has achieved exceptional growth in its top line. They were able to increase it by 19.53 percent to $15,618 million in 2021, up from $13,066 million in 2020. This is as a result of an increase of demand in advanced safety and user experience features which provided the segment an outstanding growth on both its contributed revenue and contributed operating income by 14 percent YoY and 39 percent YoY, better than unfavorable growth rate in 2020 and 2019. According to management, the growth is being driven by new infotainment programs being launched in Europe and in-cabin sensing programs being launched in both North America and Europe.
Q4 2021 Earnings Call Presentation (Aptiv.com)
The management anticipates continued improvement in global vehicle production, as illustrated in the image above, with the goal of outperforming the year 2021. APTV generated a new record business bookings amounting to $24 billion in 2021, up 33 percent from $18 billion the previous year, boasting an outstanding growth over market in both of its core operating segments (Signal & Power Solutions and Advanced Safety & User Experience segment) by 15 percent and 10 percent respectively. Despite its strong top line performance, APTV generated an all-time low ROE of 6.49 percent on top of a 67 percent decline in its bottom line to $590 million in 2021 from $1,804 million in 2020. This also resulted in a sharp decline in its earnings per share (EPS) to $1.95 in 2021, down from $6.72 in 2020 and $3.85 in 2019. On the brighter side, the management provided a positive outlook for its calendar year 2022:
We expect revenue in the range of $17.75 to $18.15 billion, up 15% of the midpoint compared to 2021. With global vehicle production expected to grow 6% for the full year, this translates in a nine points of growth above market in line with our updated 8% to 10% growth over market range. Consistent with prior forecast, this range is multiyear and covers 2022 and 2023.
For 2022, We estimate adjusted earnings per share to be $4.35, an increase of 42% over the comparable adjusted 2021 totals. We expect 2022 operating cash flow of just over $2 billion driven by the earnings increase in favorable working capital of roughly $400 million.
APTV Relative Valuation (Data From Seeking Alpha, Prepared by InvestOhTrader)
Amphenol (APH), Continental AG (OTCPK:CTTAY), DENSO (OTCPK:DNZOF), Lear (LEA), Magna (MGA), Valeo (OTCPK:VLEEF), Visteon (VC).
APTV’s slowing bottom line and high valuation are for sure not the right ingredients to attract the bulls as of the moment, with all of the metrics mentioned above being relatively expensive than its peers’ average. The outstanding projected growth in its earnings per share demonstrates a positive catalyst for APTV if they execute their plan to accelerate growth in a software-driven future effectively. However, assuming an improving overall market at an implied 15.84x earnings with $12.22 EPS in 2026 and discount rate of 12 percent, APTV should be trading only at $109 per share.
APTV Weekly Chart (TradingView.com)
APTV recently broke its multi-month support level as shown in the image above, along its 20- and 50-day simple moving averages, indicating a short-term bearish momentum. Its MACD indicator also shows bearish momentum as well as entering a negative MACD territory. Further downside may trigger the stock to retest its 200-day simple moving average. However, a positive catalyst from strong top and bottom-line performance and capitalization of market share gains may outweigh the company’s current competition risk.
While APTV’s bottom line is slowing and its ROE is declining, the company’s potential future cash flow from Wind River and the rapidly-growing market are reasons enough to speculate on this stock. APTV will remain liquid following the acquisition, as there will be no material maturing debt until 2024, and it currently has $3,139 million in cash and cash equivalents. Aptiv has a record current ratio of 2.01x in 2021 and an interest coverage ratio of 8.09x with a positive projection from the management of cash flow from operation of over $2 billion in 2022. In my opinion, APTV can absorb additional interest expense as a result of debt financing associated with its recent acquisition. I am bearish on the company’s short-term outlook, but neutral on its long-term due to its recent game-changer acquisition.
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