EUR 850.00 For Business Accounts Only

Morningstar | Aptiv Reports Solid 2018 Results, Positive 2019 Outlook; Maintaining $57 FVE

Narrow-moat Aptiv, which provides software, electronic, and electrical technologies that enable vehicular power distribution, signal processing, automated driving, and connected services to the global automotive industry, reported 2018 earnings per share before special items of $5.26, $0.13 better than the sell-side consensus but $0.62 higher than the 2017 reported EPS. Revenue increased 12% to $14.4 billion led by 18% growth in the advanced safety and user experience group but also a 9% increase in signal and power solutions. Adjusted operating income rose 9.8% to $1.751 billion from $1.594 billion, representing 30 basis points of margin contraction to 12.1%.

Management guidance for 2019 included revenue of $14.6 billion-$15.0 billion, adjusted operating income of $1.720 billion-$1.800 billion (margin of 11.8%-12.0%), free cash flow of $1.7 billion, and EPS of $5.25-$5.45. We forecast 2019 revenue to increase 3.3% to $14.9 billion, including 2.7 percentage points of negative currency translation on Aptiv’s roughly 30% European revenue exposure. We also forecast higher research and development on increased spending to develop autonomous driving technologies, resulting in our estimated 12% adjusted operating income margin. Consequently, our EPS estimate is $5.30 for 2019.

Despite our expectations for Aptiv’s 2019 performance, we think the market has more than recognized the company’s growth and margin expansion potential. Even though the sell-side consensus price target has dropped to $87 from $106 since August 2018, one would have to believe a normalized sustainable midcycle EBITDA margin of 21.5% versus the 2018 EBITDA margin of 16.7%, the historical 10-year median of 14.8%, and our 15.5% 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 39% premium to our $57 fair value estimate.