Delphi
Automotive (DLPH, $68.47): “The Benefits of Being a Trendsetter”
By:
Clare McNamara, AIM student at Marquette University
Disclosure: The AIM 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.
Summary
•
Delphi Automotive PLC (NYSE:DLPH) is
a vehicle component manufacturer and provider of electric and electronic,
powertrain and safety technology for automotive and commercial vehicles. The
business is split into three segments including Electrical/Electronic
Architecture, Powertrain Systems, and Electronics and Safety.
•
Fuel innovation is finally starting to take off and become more common, and
Delphi is the company to follow for it.
•
What the first recent surge in auto-sales post-recession means for Delphi this
coming year.
•
‘Active-safety’ is trending upward, which will help Delphi’s top-line.
•
May not be the best time to buy DLPH because of high multiples, but a great
time to hold.
Key points: Delphi
Automotive PLC is one of the front-runners when it comes to fuel innovation and
technology for automotive and commercial vehicles; however, just like the rest
of the auto industry, they took a hard hit in January when U.S. auto-sales
missed estimates for the end of 2015. This brought into question the
forward-looking health of the auto markets in Western Europe, North America and
China.
While
Delphi is a large company, they are not the largest and understand their
position in the industry, which is why they focus on only a few segments within
the industry. However, the ones they do focus on, they do well, like their more
than 20% market share of auto market for electrical distribution and connection
systems and 10% market share in the Powertrain segment area. They are small
enough to make dynamic changes in the market, with there still being room to
capture more market share, but large enough to supply to auto makers like Volkswagen
and General Motors.
‘Active-safety’
is a new area for the auto industry, and one that Delphi has already started to
become an established leader in. The technology includes things like auto-stops
when the car gets too close to the one in front of it, called a collision
avoidance system, and early warning signals to drivers like when they are
changing lanes. Delphi’s Electric and Safety Technology segment has been the
fastest growing segment for them in 2015, growing around 50%. There is only
room for this segment to grow too, since they recently acquired the software
systems company, Ottamatika.
Although
DLPH has a bright future with plenty of opportunities for growth, it is still
part of the auto industry. The auto industry was hit very hard by the recession
in 2008, and is still having a rough recovery with guidance being brought down
recently. Delphi is very exposed to the cyclicality of the industry and is
still not at it’s cheapest with a P/E of 13.35 in 2015. However, this is
estimated to decrease in the coming years as earnings increase.
What has the stock done lately?
Like
other auto stocks, DLPH has since rebounded slightly from the January drop,
where it was trading at a low of $55.59; it is now trading around $70. However,
the company itself has been doing quite well in earnings, beating estimates by
about 1.5% in both February and May.
Past Year Performance: Delphi
Automotive underperformed during this 12-month holding period by 4.61%. The
beginning of the period was fairly stable, with the firm steadily appreciating
October through December. This streak ended in January when guidance for
revenues and operating margins were decreased from previous estimates, along
with the U.S. auto sales greatly missing forecasts for the previous year.
Delphi rebounded from this sell off by reporting in February that they beat
earnings estimates by 1.46%.
Source: Google Finance
My Takeaway
While
Delphi may not have the strongest auto market to work with right now, with the
possibility of North American and European markets rolling back and the growth
slow down in China. Still, I think those may only be speed bumps in the larger
picture for Delphi, which seems to have a real growth story on its hands. I
believe that the ‘active-safety’ segment could be a major winner for them, not
only now, but in the future as well with driverless cars becoming more and more
of a reality. I wouldn’t say the P/E and other valuations like a DCF are cheap
enough to render this a buy, however, it is a solid hold for the AIM
International portfolio.
