Wednesday, December 13, 2017

A current AIM International Fund Holding: Delphi Automotive PLC (DLPH) by: Grant Runnoe "The Position Accelerates Forward"

Delphi Automotive PLC (DLPH, $100.86): “The Position Accelerates Forward”

By: Grant Runnoe, 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.

  • Delphi Automotive PLC (NYSE: DLPH) is one of the world’s largest automotive part manufacturers running through four segments: Electrical/Electronic Architecture, Powertrain Systems, Product & Service Solutions and Electronics & Safety.
  • The company’s plan to spin off the Powertrain System segment has accelerated into 1Q18.
  • As of December 5th, Delphi Automotive will trade under a new name Aptiv (NYSE: APTV) leaving its spin-off, Delphi Technologies trading under ticker DLPH
    • For every three shares of Delphi Automotive owed as of the close on 11.22.17 shareholders received one share of Delphi Technology.
  • Delphi Automotive is well positioned to lead the trends towards autonomous and electric vehicle which is expected to reach incremental content per vehicle of $5,000 by 2020.
Third Quarter Highlights
  • Announced acquisition of nuTonomy specialized in advanced automated driving technology.
  • Repurchased shares and paid dividends of $172 million.
  • Revenue increase 6% YoY to $4.3 billion.
  • +6% Europe, +19% Asia, +25% South America, -8% North America
  • GAAP operating margins of 11.3%.
  • Record bookings of $2 billion in 2017 YTD.
  • Operating margins +30 bps YoY, operating cash flow +16% YoY.
  • Active safety revenues +70% during 3Q17.
  • Raised guidance for 4Q17 and FY17.

Key points: The Powertrain spin off will be complete in 1Q18 leaving two companies, Delphi Automotive and Delphi Technology. Liam Butterworth has been named CEO and President of Delphi Technologies PLC. He currently holds the position of SVP of Delphi and president of the Powertrain system segment. Mr. Butterworth has been with the company since 2012, joining with the acquisition of FCI Holding SAS’s motorized vehicles division where he held the president and general manager role. Vivid Sehgal has been named CFO. Prior to joining the firm he worked as the CFO at LivaNova PLC. Delphi Technologies will focus on electrification (mild hybrid to full electronic vehicles), software and control and internal combustion.

Delphi deepens its pipeline with the acquisition of nuTonomy, a provider of autonomous driving software and technology. Delphi’s goal of accelerating their global fleet expansion will be greatly accelerated as a result of the acquisition of nuTonomy. Delphi reportedly will place 60 autonomous vehicles on the road across 3 continents by year-end as well as gain 70 experienced engineers and scientist, 25 PhDs and commercial relationships such as Lyft, Grab and PSA. This acquisition is another example of Delphi’s initiative to remain the global leader in autonomous software and technology capabilities as they previously acquired Ottomatika, an autonomous driving software developer and Control-Tec and Movimento which are data service companies.

Delphi is well positioned to capture future industry growth. Internal combustion engines, which currently dominate the market, are expected to continue to grow at a CAGR of 1% from 2017-2025, whereas electrification penetration is forecasted to increase at a 32% CAGR. Catalyst for expansion is that of regulation. China has implemented its New Energy Vehicle (NEV) program that incentivizes plug-in hybrid electric vehicles (PHEV) and battery electric vehicles (BEV). Europe’s regulation regarding CO2 demands the need for electrification as well as consumer trends toward eco-friendly alternatives is also expected to increase electric vehicle production. Delphi holds a $4B lifetime backlog in this space.

Internal combustion engines will continue to grow, with the requirement that they continue to find efficiency gains. Active drive assistant (ADA) systems continue to drive revenue as the demand for these technologies accelerates. Delphi indicated in their 3Q17 earnings call that they expect revenue from ADA systems to top $800 million in 2018 due to increased penetration with existing customers, and expand with new customers.

What has the stock done lately?

Delphi beat EPS estimates by $.09 and revenue estimated by 5.9% reaching roughly $230 million. The stock continues to work as they post a 3 month returns of +7%. Delphi continues to accelerate their market position gaining share and engaging in strategic acquisitions (nuTonomy) propelling themselves forward. Although the market has experienced flat growth in vehicle production Delphi posted a +4.4% organic growth for the quarter.

Past Year Performance: Delphi has steadily outperformed both the S&P and Russell Global Ex US with a year to date return of 49.76% return. Delphi was placed into the AIM International Equity Fund on 1.27.14 ($59.59) with a Price Target of $71.45. The stock currently trades at $100.86 posting a 69.3% return.

My Takeaway

Delphi has been a steady out performer in the market. The company has grown both organically and through strategic acquisitions, allowing the company to grow market share in a challenging automotive market space. With market gearing towards autonomous vehicle and electric vehicle