Morningstar | Aptiv 1Q Results Solid but Management Reduces 2019 Guidance: Maintaining $66 FVE
Narrow-moat Aptiv, provider of software, electronic, and electrical technologies that enable vehicular power distribution, signal processing, automated driving, and connected services to the global automotive industry, reported first-quarter 2019 diluted earnings per share before special items of $1.05, $0.04 better than the $1.01 sell-side consensus EPS estimate but $0.24 below the year-ago EPS. Revenue slipped 1.5% to $3.6 billion on a 2.1% decline in the signal and Power Solutions group but a 0.9% decrease in Advanced Safety and User Experience. Adjusted for unfavorable currency effect, higher commodities, and divestitures, organic revenue increased 4%. Adjusted operating income dropped 19.2% to $345 million from $427 million representing 210 basis points of margin contraction to 9.7%.Management reduced guidance for 2019 on more unfavorable currency and lower global light vehicle production than in its prior guidance. Revenue is now expected to be in a range of $14.425 billion-$14.825 billion, down from the prior range of $14.6 billion-$15.0 billion. Adjusted operating income is now forecast in a range of $1.630 billion-$1.710 billion, from $1.720 billion-$1.800 billion. Free cash flow guidance of $1.7 billion was reduced to $1.65 billion, and the prior EPS range of $5.25-$5.45 was lowered to a range of $4.90-$5.10. The market reacted with a 5% sell-off in the share price.
Despite the market's reaction, we think the shares remain overvalued. We recognize the company’s growth and margin potential. However, with the sell-side consensus price target at $92, one would have to believe a normalized sustainable midcycle EBITDA margin of 20.5% versus the 2018 EBITDA margin of 16.7%, the historical 10-year median of 14.8%, and our 16.0% midcycle assumption. In our opinion, Aptiv stock is valued as though economic cycles no longer exist. This 2-star-rated stock currently trades at a 20% premium to our $66 fair value estimate.
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