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Elevator Pitch
I have a Buy investment rating for Aptiv PLC (NYSE:APTV) shares. My prior article written on November 18, 2023 drew attention to the United Auto Workers strike’s effects and the company’s profitability outlook.
This current update reviews Aptiv’s most recent quarterly financial performance and its shareholder capital return target, which justify a Buy rating for the stock. APTV’s actual Q1 2024 operating margin beat the consensus projection by +1.1 percentage points. This gives me the confidence that the company can meet its 11.8% full-year operating margin. On the other hand, APTV’s updated share repurchase goal of $1.5 billion for the current year is equivalent to a buyback yield at the high single digit percentage level.
First Quarter Bottom Line Surpassed Analysts’ Expectations
APTV released the company’s Q1 2024 results announcement on May 2 before trading hours. Aptiv’s shares jumped by +11.5% on the same trading day, which implies that the market viewed its latest quarterly results as a positive surprise.
The company’s normalized EPS grew by +27.5% YoY from $0.91 for the first quarter of 2023 to $1.16 in the first quarter of this year. Aptiv’s actual Q1 2024 bottom line came in +16.0% better than the consensus EPS projection of $1.00.
Revenue for APTV increased by +1.7% YoY in Q1 2024, which represented a minor revenue miss of -1.8% (source: S&P Capital IQ). As such, it is reasonable to think that better-than-expected profitability (as opposed to top line expansion) was the main reason for Aptiv’s substantial earnings beat for the recent quarter.
In my previous November 18, 2023 article, I shared my opinion that “APTV can surprise the market in a positive way with its actual operating profit margins in the long term.” In this latest quarter, Aptiv’s operating profitability surpassed expectations. In specific terms, the company’s normalized operating margin expanded by +2.0 percentage points YoY to 11.1%. This was +110 basis points ahead of the consensus operating margin estimate of 10.0% as per S&P Capital IQ data.
In its Q1 2024 results announcement, Aptiv explained that “cost reduction initiatives and increased volumes” boosted the company’s operating profitability. In other words, APTV’s operating margin expansion and above-expectations earnings for the recent quarter were driven by expense optimization and positive operating leverage (higher volume on a fixed cost base).
Upward Revision Of Full-Year Earnings Guidance
APTV raised the mid-point of the company’s fiscal 2024 normalized EPS guidance from $5.80 to $6.05 in tandem with its first quarter results. Aptiv’s updated full-year bottom line guidance was +6.7% higher than the sell side’s consensus normalized EPS forecast of $5.67. The favorable revision in full-year earnings guidance was also another positive factor contributing to the +11.5% jump in APTV’s stock price on the day of the earnings announcement.
The revised bottom line guidance for full-year FY 2024 translates into a +24.5% earnings growth for the company this year.
A key driver is the improvement in operating profitability, as Aptiv is guiding for an expansion in its operating margin from 10.6% in FY 2023 to 11.8% for FY 2024. As mentioned in the preceding section, APTV’s operating margin improved significantly in Q1 2024, and this positive momentum is expected to be sustained for the rest of 2024. At its Q1 2024 earnings call, Aptiv emphasized that the expected “increase in sales” supported by “new program launches” will “deliver margins higher in the second half with volume flow-through.” This suggests that APTV’s 2H 2024 operating profitability will benefit from more significant operating leverage effects as compared to the first half of the year.
The other key driver is a restructuring transaction. Aptiv disclosed in its Q1 2024 earnings announcement that its “common equity interest” in the loss-making “Motional autonomous driving joint venture” is proposed to be reduced from 50% to 15%. As per its disclosures at its first quarter results briefing, APTV’s expected FY 2024 and FY 2025 normalized EPS will increase by +$0.30 and +$0.90 with the completion of this restructuring move.
Details Of The Proposed Motional Restructuring Transaction
Aptiv’s Q1 2024 Earnings Presentation Slides
In a nutshell, APTV’s earnings growth outlook for full-year FY 2024 is favorable, thanks to sustained operating margin expansion and the reduction in its stake in a loss-making joint venture.
High-Single Digit Buyback Yield Is Enticing
Moving beyond the company’s financial performance, Aptiv revealed at the company’s recent quarterly earnings briefing that it is “doubling our share repurchase target from $750 million to $1.5 billion during 2024.” The company has already spent $600 million on share buybacks in Q1 2024, which represents 40% of its new share repurchase goal.
There are two positive takeaways from APTV’s updated share buyback goal for this year.
One key takeaway is that Aptiv has now become an attractive investment candidate for investors focused on shareholder capital return. APTV’s estimated FY 2024 share buyback yield (share repurchases divided by market capitalization) is 7% as per its new share buyback target.
Another key takeaway is APTV’s aggressive share repurchase goal sends a clear message that its shares are trading at a discount to fair valuation. At its Q1 earnings call, Aptiv stressed that “we continue to buy back stock at fairly healthy levels” as “we view our stock is undervalued.” As a reference, Aptiv is now trading at 8.0 times consensus next twelve months’ EV/EBITDA, which is way below its five-year mean EV/EBITDA multiple of 12.7 times (source: S&P Capital IQ).
Key Risks
The key risks for Aptiv are weaker-than-expected margin expansion and lower-than-expected buybacks.
APTV’s operating profitability improvement is a major reason for the company’s Q1 earnings beat, and will also likely support its full-year earnings growth guidance of +24.5%. Assuming that Aptiv’s actual margins fall short of expectations, earnings misses for the company in subsequent quarters are highly probable.
Aptiv’s current high-single digit buyback yield is based on the expectations that the company will deliver on its $1.5 billion share repurchases target. A failure to meet its buyback goal could mean that investors opt for other stocks which have better buyback yields.
Closing Thoughts
I still have a Buy rating awarded to APTV. The company’s operating margin improvement and doubling of its buyback target are positive factors that leave me bullish on the stock.
