(ticker: APTV) cut its fourth-quarter guidance Wednesday, partly because of a slowdown in Chinese auto production. Shares of the supplier of auto electronics and safety equipment still rose 4.1%.
So it looks as if the Chinese slowdown isn’t new news and may be reflected in all automotive-stock prices. After all, things have looked shaky for a while. Automotive stocks are down about 15% year to date.
APTV has fallen about 8%, including Wednesday’s rally. The stock has performed a little better than the automotive sector because the company isn’t totally reliant on the absolute level of global car sales. It outgrew the overall car market this quarter by 13 percentage points. And reported sales growth in Asia was 9% despite the more challenging backdrop in China.
That outperformance reflects the fact that APTV is as close to a pure play on the electrification of the car and autonomous driving as investors can find now.
The company split off from
Delphi Technologies (DLPH)
at the end of 2017 in an effort to focus fully on those two trends. Delphi kept the fossil fuel powertrain business when the companies separated.
But don’t forget that, officially, Delphi was spun out, and the remaining company was renamed Aptiv. That means that if you look at today’s numbers relative to old multiples and margins, you aren’t comparing apples to apples.
Consider that APTV trades at about 14 times forward estimated earnings, versus 10 times for the overall car-parts industry. That multiple of 14 looks like a premium to its history and its sector.
Too pricey? Not necessarily. The premium evaporates if you look at APTV stock only this year, when Aptiv was a stand-alone entity. It’s at a 20% discount relative to that shorter history, just like other auto suppliers.
Aptiv gets the premium to other suppliers because of hopes for thematic growth—the idea that it could benefit if people are driven to work by robots in the near future. Yet the safety business—the technologies that enable hands-free driving—and the electrification business are already driving actual growth. Current estimates have Aptiv increasing revenues more than 6% a year for the next three years, which is about twice the rate for comparable parts companies.
Aptiv management said on their conference call that they have “definitely seen an inflection point as it relates to powertrain electrification.” Conference calls at auto companies back up that observation.
General Motors (GM)
listed autonomous driving, electrification, car connectivity, and data monetization on the first page of its conference-call presentation, under creating shareholder value, and
said on its call that “the electrification of our sales is going to be a reality.”
Autonomous driving is moving closer to fact than science fiction, too.
(HMC) talked about its partnership with GM to develop fully autonomous cars for GM’s Cruise division on its conference call this month. And Ford (F) pointed out it was making strides in the development of its autonomous-driving program. All vehicle makers are investing in autonomy just to compete.
For APTV stock, it isn’t just about the number of people around the world that can afford a car. There are big changes afoot in the car business. While it can be difficult to predict if a single manufacturer will gain a sustainable competitive advantage through autonomy and electrification technology, investors can still take a “picks and shovels” approach and buy the technologically advanced suppliers.
Write to Al Root at email@example.com