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Morningstar | Veoneer 1Q Disappoints the Market, Cash Burn Means Capital Raise Needed, Raising FVE to $26 from $24. See Updated Analyst Note from 29 Apr 2019

Narrow-moat rated Veoneer, supplier to the global automotive industry of autonomous driving technologies, reported first quarter 2019 earnings per share before special items (EPS) of -$1.57, $0.37 worse than the consensus EPS of -$1.20. We think that the underperformance was attributable to much worse-than-market-expected unfavorable operating leverage from the combination of lower global light vehicle production volume while ramping-up spending on the development of new business that has yet to start generating revenue. We raised our Veoneer fair value estimate to $26 from $24 per share due to a slightly more favorable discount rate and the time value of money since our last update.

Management said that the company will deliver on growth coming from an order book representing total future revenue of $19 billion, with some of the backlog starting in late 2019 and launching through 2022. However, lower customer production volume, unfavorable model mix, and higher spending for more complex program development creates cash burn that requires management to raise $500 million in capital. The company did not provide any details on the new capital. We had already been forecasting that Veoneer would need to raise capital on our belief that development spending would substantially increase on higher orders for more advanced driver assist systems in the near-term as automakers pull-back from longer-term level 4 and level 5 autonomous vehicle development due to complexity and cost.

The market reacted to the news by selling-off shares resulting in a 16% price decline. When we launched coverage of Veoneer at the end of August last year, the stock traded at 1-star with a 104% premium over our fair value estimate. Despite the market's sell-off since we launched coverage, including today's selling action, the stock still trades at 3-stars but at a 13% discount to our fair value. In our opinion, shares are now reasonably priced relative to our $26 fair value estimate.