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Elevator Pitch
I rate Aptiv PLC (NYSE:APTV) stock as a Buy.
My earlier January 31, 2023 update was focused on the preview of Aptiv’s financial results for the final quarter of last year, and the evaluation of APTV’s inorganic growth prospects.
I highlighted the impact of the 2023 United Auto Workers or UAW strike on APTV and Aptiv’s margin expansion potential in the latest write-up.
APTV seems to have taken a much smaller-than-expected hit from the recent UAW strike, and its long-term profitability improvement potential hasn’t been recognized by the market. As such, I decide to upgrade my rating for Aptiv from a Hold to a Buy.
Aptiv’s Full-Year Guidance Stays Unchanged Despite UAW Strike
The UAW strike for the current year lasted for six weeks, or 45 days to be specific, between September 15 and October 30. It is no surprise that Automotive OEMs and suppliers were negatively affected by the recent UAW strike.
Aptiv’s shares declined from $102.46 as of September 15 to $86.39 at the end of the October 30 trading day. APTV’s last done stock price as of November 17 was even lower at $81.18. This means that Aptiv’s share price has corrected by -20.8% since the UAW strike began. During this time period, APTV’s consensus forward next twelve months’ EV/EBITDA compressed from 11.4 times to 8.9 times, while its consensus forward next twelve months’ normalized P/E de-rated from 19.0 times to 14.9 times as per S&P Capital IQ data.
In my view, APTV’s significant share price correction and meaningful valuation de-rating don’t seem to be justified based on a historical comparison of UAW strikes and the company’s guidance.
General Motors’s (GM) Q4 2029 earnings suffered from a “$3.6 billion hit” during the prior UAW strike between September 15, 2019 and October 25, 2019 as mentioned in an October 25, 2023 Reuters news report. In comparison, GM has guided for a relatively more modest “$600 million EBIT impact” for Q4 2023 resulting from this year’s UAW strike at its third quarter results call.
In the case of Aptiv, APTV has chosen to stick to the company’s existing full-year fiscal 2023 guidance after reporting its Q3 2023 results, notwithstanding the negative impact of the latest UAW strike. Specifically, Aptiv disclosed in its third quarter earnings presentation slides that the UAW strike is projected to have a negative $80 million impact on its FY 2023 operating profit, and this accounts for 3.8% of its full-year operating income guidance of $2,125 million (mid-point). APTV’s unchanged guidance points to management’s expectations of the company’s EBIT growing by +34.1% from $1,585 million in FY 2022 to $2,125 million for FY 2023.
At the company’s Q3 2023 earnings briefing, Aptiv noted that it had “higher volumes (from other clients unaffected by the UAW strike) helping offset the strike impact.” APTV also shared at the most recent quarterly earnings call that it has “ongoing performance initiatives” such as “reductions in supply chain disruption costs” to boost the company’s profitability. These factors might help to explain why Aptiv was able to keep its existing management guidance for FY 2023 intact, even after taking into account the headwinds relating to the UAW strike.
The -20.8% share price correction and substantial valuation multiple compression for Aptiv since mid-September this year appear to be unjustified, considering the low-to-mid single digit percentage impact of the strike on APTV’s operating profit.
APTV Could Beat Market’s Expectations Relating To Long Term Margin Expansion
At the company’s 2023 Investor Conference on February 14 this year, Aptiv emphasized that it has set a target for “operating income margins to exceed 14% in 2025” and shared its goal of achieving a “17% plus operating margin by 2030.” APTV’s full-year FY 2023 operating margin guidance is in the 10.4%-10.7% range as indicated in its third quarter results presentation.
There is a significant difference between the company management’s expectations and the Wall Street analysts’ predictions. The sell-side’s consensus FY 2025 operating margin forecast is 12.7% (source: S&P Capital IQ), or about -130 basis points below Aptiv’s operating profitability target.
I am of the opinion that APTV can surprise the market in a positive way with its actual operating profit margins in the long term. The key drivers for Aptiv’s profitability improvement going forward are expected to be the positive contributions from new M&A deals and a more favorable revenue mix.
Towards the end of last year, Aptiv announced that it “completed the acquisition of Wind River, a global leader in delivering software for the intelligent edge.” At its Q3 results briefing, APTV highlighted that Wind River is “a 80% gross margin business”, while Aptiv’s overall gross profit margins are at the high-teens percentage level.
Separately, APTV highlighted at the company’s third quarter earnings call that the “high-voltage content (business’) margin” relative to the core “S&PS (Signal And Power Solutions) margin” is “accretive by a couple (percentage) points.” The company’s high-voltage electrification products are projected to account for less than 10% of its FY 2023 top line as per Aptiv’s guidance. This implies that there is room for Aptiv to expand its margins over time with a more optimal sales mix driven by an increase in revenue generated by the higher margin high-voltage business.
Final Thoughts
Aptiv shares are assigned a Buy rating. APTV has the potential to deliver operating margins that are better than what the market is currently expecting, while the company has left its FY 2023 guidance unchanged even after considering the negative effects of the UAW strike.
