EUR 850.00 For Business Accounts Only

Morningstar | DLPH Updated Forecasts and Estimates from 22 Feb 2019

Narrow-moat rated Delphi Technologies completed its first year as a standalone company after being spun-off from former parent Aptiv (formerly Delphi Automotive). Full-year 2018 diluted earnings per share before special items, or EPS, were $4.38, $0.19 better than the sell-side consensus EPS of $4.19 but $0.85 worse than last year’s comparable proforma EPS of $5.23. Revenue was just 1.8% higher to $4.86 billion versus pro-forma 2017 revenue of $4.78 billion with a 1.2% increase in powertrain systems revenue but only 0.3% higher aftermarket revenue. This 5-star rated stock currently trades at nearly 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 its 2019 outlook including 1%-2% organic revenue growth but including expectations for weakening global production and development of an unfavorable product mix, guidance is for a 1% to 3% decline. The company had previously told analysts to expect 9%-10% EBIT margin but updated guidance to the low end of the range at "around" 9%. Margin contraction is driven by unfavorable product mix, incremental engineering cost for future programs, and a full year impact from tariff-related costs. We reduced our 2019 estimates for revenue and profitability resulting in EPS of $3.00, at the low end of management guidance. The change to our Stage I forecast lowered our fair value estimate by less than $1, partially offsetting time value money, but not enough to change our $52 fair value estimate.

Even so, 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 impact fuel injector and valvetrain product volume growth.