Thursday, February 4, 2016

32nd AIM equity update by John Grant, Mobileye (MBLY): Tough Short Run, But Exciting in the Long-Term

Mobileye N.V. (MBLY, $28.70): A More Modest Take on Future Alpha
By: John Grant, AIM Student at Marquette University

Image result for mobileye logo

Disclosure: The AIM International Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

·         Mobileye N.V. (NYSE: MBLY) designs and develops software and related technologies for camera-based advanced drives assistance systems (ADAS) for major motor vehicle corporations in North American, European, Middle Eastern and Asian countries.

·         The stock has been on the decline since $61 peak in 7/2015, revenue guidance for 2016 fell below consensus (40% y/y growth, $335M)

·         Big announcement at CES, Road Experience Management (REM) solution minimizes costs, improve revenue guidance.

·         Auto suppliers are becoming increasingly cheap and have positive earnings outlook, FY16 launches appear attractive as MBLY adds to their backorder.

·         Legal momentum to speed up the integration of ADAS in Europe, Americas and Asian countries.

Key Points:
As MBLY’s stock price continues to slide (-36.95% 3-month change) institutional investors are taking advantage of the underpriced security. Of the six largest institutional holders, Fidelity Management & Research Co. was the only one to shed a portion of its position, the other five have exponentially increased their exposure to MBLY (Figure 3). MBLY continues to hold a leading position in the ADAS market as they expand their data collection, maintain a 100% RFQ success rate and legal tailwinds become more relevant.

In January 2016 MBLY made a presentation at CES introducing their Road Experience Management (REM). The system uses advanced artificial intelligence to create maps based on local coordinate systems, the program requires a very low bandwidth. This low bandwidth and ease of integration to their other systems makes MBLY’s REM the best product when observing cost and performance.

MBLY has already begun efforts with General Motors to integrate REM into existing program launches, the relationship with GM has been growing significantly. On January 5th, 2016, MBLY announced they had signed a Memorandum of Understanding with Volkswagen and further announced a strategic partnership to implement the REM into VW’s vehicles. MBLY has identified a third OEM customer, of comparable size to GM and VW, will be announced in 2016. By announcing REM and the partnerships already established, MBLY is further increasing barriers to entry for competitors.

MBLY continues to win every RFQ which it participates in, adding VW as a customer will be a catalyst for future ADAS integration and revenue growth. Management indicated the firm has added a high volume of new launches for the back end of FY16, including five programs and 52 vehicles. The Detroit Auto Show gives investors’ confidence there will be a higher volume of new vehicle launches in 2016, an opportunity for organic revenue to increase in 2016.

Legal tailwinds remain favorable as government bodies in Europe (30.2% of total revenues), Americas (55%) and Asia (5.8%) continue to require ADAS and other safety technologies in vehicles. Driver error accounts for 80% of all fatal car accidents, which are expected to be the fifth leading cause of death by 2030. ADAS technologies have been proven to reduce collisions. OEM’s will be required to have at least one ADAS in their vehicle to meet a 5-star rating by the end of 2016. Additionally, AEB’s (MBLY specialty) are going to receive a higher weighting in an overall score on safety ratings, making the MBLY product more in demand. NHTSA has ADAS’ on their list of recommended technologies and are continuing to make a push on adding it to the required list to meet a 5-star safety rating in the USA. Lastly, the China NCAP expects ADAS to become a criteria of their 5-star safety rating by 2018 year end.

Figure 1
Source: FactSet

What has the stock done recently?
MBLY has had a tough run recently with the 3 month stock price change at -36.95% versus -32.12% YTD (Figures 1 & 2). This largely is attributed to their downward revenue revisions and investor focus on near-term profitability. MBLY has a 52 week beta of 1.32 and it has become common to see 4-6% price fluctuations on a given day. Analysts have begun slashing unrealistic 12-month price targets, which has caused heighted negative perception towards the stock. However, increasing revenues, earnings and free cash flow have depressed price multiples from a historic perspective and make MBLY an attractive long-term investment at this time.

Figure 2
Source: FactSet

My Takeaway
I am still bullish on MBLY, however I would only recommend the stock to investors with a long term holding period. MBLY continues to reiterate the growing demand for ADAS products through their contract wins (100% success rate) and legal tailwinds in regions of major revenue exposure. MBLY’s dominant market share and unique business model as a third tier supplier will allow for them to dramatically increase production to realize meaningful revenues and earnings in the coming years. MBLY is attractively priced at $28.70 (2/1/16 close) with a P/E (NTM) 38.6x vs. 91.1 5-year average and a P/S of 32.8x vs. 66.9x 5-year average. I believe MBLY will remain fairly volatile until more reported product launches between the end of 2016 and 2018 begin to hit the market and the firm recognizes meaningful revenues and earnings.  

Figure 3
Source: FactSet

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