EUR 850.00 For Business Accounts Only

Morningstar | Faurecia Reports Solid 2Q Results, Confirms 2019 Guidance; Raising FVE Slightly to EUR 40

No-moat 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 quarters but complete financials for the first half and full year. For the first half of 2019, Faurecia reported EUR 8.97 billion in revenue, representing a 0.2% decrease on an as-reported basis compared with the prior year. Excluding the favorable impact of currency translation and the acquisition of Clarion, revenue would have declined 3%. However, global light-vehicle production declined 7% during the period, meaning that Faurecia organic revenue outperformed global auto production by roughly 4 percentage points.

Faurecia's first-half result was surprisingly strong, but management only confirmed full-year guidance—"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 USD/EUR and 3 percentage points incremental revenue from the Clarion acquisition), we are already at the high end of management’s forecast and see no reason to change our fair value estimate, which increased by EUR 1 because of the time value of money since our last update. Shares of 3-star Faurecia are trading at a 13% premium to our fair value and are reasonably valued relative to our forecasts for cash flow and returns.

The Asia region led revenue growth, increasing 4.4% at constant currency to EUR 1.72 billion, but including currency, the as-reported revenue represented an 11.2% increase compared with the same period a year ago. China revenue growth with OEM customers increased 3.3% to EUR 1.21 billion. The China result was even more impressive considering that China production dropped 15.7% during the period. North America was also up, increasing 2.5% on an as-reported basis. However, excluding a positive 8.2% currency impact from the U.S. dollar, revenue would have declined by 6.3%, underperforming North American production because of the end of two seating programs. While as-reported European revenue declined 4.2%, excluding currency translation, revenue would have been down 3.8% despite a 5.6% decline in European OEM production.

Faurecia management’s 2019 growth objectives are reasonable, at 1 to 3.5 percentage points above growth in global production. Clean air legislation becomes much more stringent and spreads to more sectors outside of 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 support 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, 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 and software-based 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 48. 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 10.2%, or 330 basis points better than the 10-year historical median EBITDA margin.