EUR 850.00 For Business Accounts Only

Morningstar | EO Updated Forecasts and Estimates from 27 Aug 2018

No-moat-rated Faurecia, the seating, interior components, and emissions control supplier, reported first-half 2017 earnings per diluted share of EUR 2.47, a healthy improvement from EUR 2.25 reported a year ago but EUR 0.12 behind the consensus EPS of EUR 2.59. The company reports only revenue in the first and third fiscal quarters and complete financials for the first half and full year. For first-half 2018, Faurecia reported EUR 9.0 billion in revenue, representing a 5.2% increase on the prior year. Excluding the unfavorable impact of currency translation, organic revenue growth would have been a solid 10.9%.

Faurecia's first half execution was strong too, posting a 30-basis-point expansion in both EBIT (7.1%) and EBITDA (11.7%) margin versus the year-ago result. Owing to solid revenue and margin performance, management tweaked full-year guidance slightly higher. The company's full-year revenue growth guidance “at constant currency” is now "at least 8%" versus prior guidance of "at least 7%." Management also raised operating margin expectations to "at least 7.2%" versus its previous forecast for "at least 7%."

With our full-year estimated 7.4% increase in revenue (including a negative 5% estimated currency impact from the U.S. dollar/euro exchange rate) and a 7.2% operating margin, we were already slightly ahead of management’s forecast and see no reason to change our fair value estimate. Shares of 1-star, no-moat-rated Faurecia are currently trading at an 86% premium over our EUR 37 fair value estimate. In our opinion, the stock is overpriced relative to our forecasts for cash flow and returns.

During the past 10 years, Faurecia’s high, low, and median EBITDA margins have amounted to 11.1% (2017), 4.4% (2009), and 6.9%, respectively. We assume margin expansion in the first three years of our Stage I forecast to 11.8%, and then assume contraction into our normalized, sustainable EBITDA margin of 8.4% in year five, representing a 150-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 and growth in higher-margin electronic products.

Even so, we think the investment community has become excessively optimistic over Faurecia’s growth potential. In our opinion, the market has valued the shares as though economic cycles no longer exist. Indicative of our premise, the current sell-side consensus price target for Faurecia’s stock is EUR 67. 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 12.0%, or 510 basis points better than the 10-year historical median EBITDA margin. In our view, the market’s valuation assumes revenue growth and margin expansion will only keep rising, as though cyclical downturns in the automotive industry are on permanent hiatus.