EUR 850.00 For Business Accounts Only

Morningstar | Delphi Tech 3Q Results Decline and Preliminary 2019 Outlook Disappoints: $52 FVE Unchanged

Narrow-moat Delphi Technologies reported third-quarter earnings per share before special one-time items of $0.72, $0.04 short of the sell-side consensus EPS of $0.76 but $0.31 worse than last year’s comparable pro forma EPS of $1.03. Revenue declined 4% to $1.159 billion but would have been down by just 1% excluding negative currency translation and aftermarket business retained by the former parent. This 4-star-rated stock currently trades at a 60% discount to our $52 fair value estimate. In our opinion, the shares are attractively valued relative to our estimates for revenue growth, cash flow, and returns on invested capital.

Management maintained 2018 guidance for flat year-over-year revenue and adjusted operating margin of 11.3%-11.5%, down 100 basis points from the prior range of 12.3%-12.5% due to tariffs, slightly higher input costs, and unfavorable operating leverage. Adjusted EPS guidance is $4.20 to $4.30. Our 2018 estimates include revenue of $4.8 billion, adjusted EBIT of $555 million for a margin of 11.5%, and EPS of $4.20.

Management also provided a preliminary 2019 outlook that included 1%-2% organic revenue growth, 9%-10% EBIT margin, capital expenditures at 7% of revenue, and break-even free cash flow. Delphi expects flat 2019 global light-vehicle production and an acceleration in diesel passenger vehicle decline. Margin contraction is driven by unfavorable product mix, incremental engineering cost for future programs, and a full-year impact from tariff-related costs. We forecast a slightly more favorable 2019 for Delphi, mainly due to our expectations that global light-vehicle demand will increase 1%-3% next year. We estimate a 3% increase in revenue to $5 billion, adjusted EBIT margin of 10.4%, and earnings per share of $3.95.

Our investment thesis remains intact. Delphi Tech benefits from globally ubiquitous clean air legislation that requires passenger vehicle and commercial truck manufacturers to electrify powertrains and enhance efficiency of internal combustion engines. We expect growth products like DC/DC converters, power electronics, as well as powertrain electronic control modules and software, to offset the effect of greater penetration of smaller-displacement engines (fewer cylinders) that negatively affect fuel injector and valvetrain product volume growth.

This note was initially published on Nov. 8, 2018.