Thursday, May 19, 2016

72nd AIM Student Equity Update by Clare McNamara. Delphi Automotive (DLPH, $68.47): “A Global Leader in the Dynamic Auto Supplier Chain"

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.


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.