EUR 850.00 For Business Accounts Only

Morningstar | EO Updated Forecasts and Estimates from 20 Jun 2019

No-moat-rated French auto-parts supplier Faurecia is required to disclose full financial statements every six months. The company reports only revenue in the first and third fiscal quarter of each year. For the first quarter of 2019, Faurecia reported EUR 4.3 billion in revenue, representing a 0.2% increase on a reported basis compared with the prior year. Excluding the favorable impact of currency translation, organic revenue growth would have declined 1.1%. However, global light-vehicle production declined 6.9%, meaning that Faurecia's organic revenue outperformed global auto production by 5.8 percentage points.

Faurecia's first-quarter result was surprisingly strong, but management only confirmed full-year guidance, saying, "Sales at constant currencies should outperform worldwide automotive production between 150 and 350 basis points." Given our full-year estimated 8% increase in revenue (including a positive 3-percentage-point estimated currency impact from the dollar/euro rate and 3 percentage points of incremental revenue from the Clarion acquisition), we are already at the high end of management’s forecast and see no reason for a fair value estimate change. The shares of 3-star Faurecia are currently trading at a 23% premium to our EUR 39 fair value estimate. In our opinion, the stock is fairly valued relative to our forecasts for cash flow and returns.

The Asia region led revenue growth, increasing 5.1% at constant currency to EUR 798 million, but including currency, as-reported revenue represented a 7.5% increase compared with the same period a year ago. China revenue growth with original-equipment manufacturer customers was impressive, jumping 46% to EUR 153 million. The China result was even more impressive considering that China production dropped 15.2%. North America was also up, increasing 5.1% on an as-reported basis. However, excluding a positive 8.0% currency impact from the U.S. dollar, revenue would have declined 2.9%, slightly underperforming North American production due to the end of two seating programs. While as-reported European revenue declined 2.7%, excluding currency translation, revenue would have been down 1.9% despite a 4.9% decline in European OEM production.

In our opinion, the 2019 growth objectives set by Faurecia’s management team are reasonable at 1-3.5 percentage points above growth in global production. Clean air legislation becomes much more stringent and spreads to more sectors outside the auto industry in the next decade, leading management to forecast 7% annualized revenue growth for the clean mobility segment. Auto manufacturers’ intense focus on consumer experience as well as technology advancements in autonomy, connectivity, and digitization supports growth in Faurecia’s electronics, interiors, and seating business groups. While our model assumes 6% consolidated revenue growth in the first three years of our Stage I forecast, including a strengthening euro against the dollar and the acquisition of Clarion, our model also takes into consideration midcycle assumptions beginning in year four with 3% lower consolidated revenue, and then a 5% decline in year five.

During the past 10 years, Faurecia’s high, low, and median EBITDA margin has been 12.2% (2018), 4.4% (2009), and 6.9%, respectively. We assume margin averages 11.1% during our Stage I forecast, including contraction into our normalized, sustainable EBITDA margin of 9.2% in year five, representing a 230-basis-point increase over the 10-year median. This reflects our belief that management has improved the company’s break-even point from restructuring in Europe as well as growth in higher-margin electronic products.

Even so, we think the investment community is slightly more optimistic about Faurecia’s growth potential. The current sell-side consensus price target for Faurecia’s stock is EUR 49. For our model to generate a fair value estimate equal to the consensus, one would have to believe that the company could achieve a normalized sustainable midcycle EBITDA margin of 10.5%, or 360 basis points better than the 10-year historical median EBITDA margin.