EUR 850.00 For Business Accounts Only

Morningstar | Faurecia Reports Solid 2018 Despite Headwinds; Maintaining EUR 37 FVE

No-moat-rated Faurecia, the seating, interior components, and emissions control supplier, reported full-year earnings per diluted share of EUR 5.09, a healthy improvement from EUR 4.40 reported a year ago but EUR 0.03 shy of the sell-side consensus. The company reports only revenue in the first and third fiscal quarters and complete financials for the first half and full year. Full-year 2018 revenue was EUR 17.5 billion, representing a 3.3% increase from the prior year. Excluding the unfavorable impact of currency translation, organic revenue growth would have been a solid 7%.

Faurecia's full-year execution was strong, posting a 40-basis-point expansion in EBIT margin to 7.2% but a 110-basis-point expansion in EBITDA margin to 12.2% versus the previous year. The performance was impressive considering that European customers' full-year production declined 5%, weighted heavily to the second half of the year because of the introduction of the WLTP standard on Sept. 1. The company's full-year 2019 revenue growth guidance, excluding the acquisition of Clarion and "at constant currency," is to "outperform worldwide automotive production by 150-350 basis points." Management also said it expects an increase in operating income and to have a margin of "at least 7%" including the acquisition of Clarion.

We expect the Clarion acquisition to be accretive to earnings but dilutive to Faurecia's margin. We estimate 2019 incremental revenue and EBIT of nearly EUR 1.5 billion and roughly EUR 15 million, respectively. With our full-year estimated 8.3% increase in revenue (including a positive 3% estimated currency impact from the U.S. dollar/euro rate) and a 7.0% operating margin, our 2019 diluted EPS estimate of EUR 5.25 is just ahead of the EUR 5.22 sell-side consensus. We view the 3-star, no-moat-rated shares of Faurecia, currently trading at an 8% premium to our EUR 37 fair value estimate, to be reasonably priced relative to our forecasts for cash flow and returns.

During the past 10 years, Faurecia’s high, low, and median EBITDA margin has been 11.1% (2017), 4.4% (2009), and 6.9%, respectively. Including the acquisition of Clarion, we assume average EBITDA margin of 10.5% during our Stage I forecast, with contraction into our normalized, sustainable EBITDA margin of 8.5% in year five. Our midcycle margin assumption represents a 160-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.