EUR 850.00 For Business Accounts Only

Morningstar | DLPH Updated Forecasts and Estimates from 19 Oct 2018

Narrow-moat Delphi Technologies announced the departure of CEO Liam Butterworth after less than a year on the job. While the unexpected exit of a C-suite executive is never a good sign, we think the market reaction, taking the share price down nearly 12% on the news, resulted from the guidance cut simultaneously announced with the CEO's departure. Because roughly 40% of Delphi's revenue comes from Europe, we suspect the change in guidance was a result of the impact on customers' production from new emissions regulations in the region that took effect at the beginning of September.

Management's previous guidance was for revenue to be up 2% to 4% on EBIT margin of 12.1% to 12.3%. Delphi cut guidance to flat year-over-year revenue on EBIT margin of 11.3% to 11.5%. We lowered our 2018 revenue estimate to $4.827 billion (from $5.083 billion) versus the year ago revenue of $4.849 billion. We dropped our 2018 EBIT margin assumption to 11.3% from 12.2% compared with 13.1% last year. The change in our 2018 estimates resulted in a $0.42 decline in our fair value estimate, offsetting only the time value of money increase since our last update. Consequently, our $52 fair value estimate remains unchanged.

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 valve-train product volume growth. This 5-star stock currently trades at a 50% 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.