Aptiv: Acquisition of Intercable Automotive should accelerate growth (NYSE:APTV)

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gorodenkoff

investment thesis

Aptiv PLC (New York Stock Exchange:APTV) is a global mobility technology and architecture company primarily focused on developing solutions for the automotive industry. The company has recently announced the acquisition of an 85% shareholding in Intercable Automotive Solution, which is engaged in the automotive industry power connection and distribution technologies. I believe that this acquisition can act as a major catalyst to accelerate the company’s growth by enhancing its capabilities and creating a strong presence in the competitive market.

About APTV

APTV is primarily an automotive-focused global technology and mobility architecture company. The company designs and manufactures vehicle parts and provides electronic and active safety technology solutions for the automotive and commercial vehicle markets. The company’s customer base is made up of the 25 largest in the world automotive original equipment manufacturers or OEMs. Its global network includes 127 manufacturing facilities and 12 technical centers to serve customers around the world. It operates in 46 countries and has 18,900 engineers, scientists and technicians who develop market-relevant products. The company’s core product line includes Signal & Power Solutions and Advance Safety & User Experience. The Signal & Power Solutions segment designs and manufactures all components of the vehicle’s electrical architecture, including connectors, wiring assemblies and harnesses, cable management, electrical hubs, and hybrid high-voltage and safety distribution systems. This segment earns 74% of the company’s total revenue. The Advanced Safety & User Experience segment offers system integration tools, critical technologies, and advanced software development for safety, convenience, and comfort in vehicles, including sensor systems, multi-domain controllers, electronic control units, vehicle connectivity systems, and applications. . developing. The Advanced Safety & User Experience segment generates 26% of total revenue. The company is experiencing strong growth in both segments, as it has recorded a turnover of $20.3 billion in the first half of fiscal year 2022, which is 81.2% higher compared to the first half of fiscal year 2021.

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Revenue trend chart

revenue trend (Investor Presentation: Slide No.: 7)

Acquisition of Interconnection Solutions

The electric vehicle market is becoming very competitive due to its various benefits such as lower emissions, growth in charging infrastructure, and low battery costs. This automotive revolution can create a strong impetus for the growth of the industry in the coming years and provide a wide range of opportunities for companies operating in this industry. It has already led to increased demand for electric vehicles due to government regulations and policies in many countries, which has intensified competition in the market. Recognizing this opportunity, the company recently signed a definitive agreement to acquire an 85% stake. participation in Intercable Automotive Solutions for $595 million. Intercable Automotive Solution deals with high voltage power distribution and high precision connection technologies. Intercable Automotive is considered a leader in the industry, with estimated sales of more than $250 million in 2022. It focuses on manufacturing the innovative solutions needed to address the challenges in vehicle electrification. Its product line consists of solid-state power centers, battery cell interconnect systems, high-voltage busbar technology, and other high-voltage power distribution solutions. Intercable’s technological and manufacturing capabilities will provide customers with an efficient and cost-effective vehicle assembly option, which may attract new customers for APTV. Its highly innovative product designs and relationships with leading European automotive OEMs can significantly enhance the company’s position as a complete system supplier to electric vehicle manufacturers and help it gain a competitive advantage in the industry. By being highly competitive in the industry and expanding its customer base, I think the company can increase its market share in the coming years, which can ultimately expand its profit margins. Looking at the current market trends and the growing demand for electric vehicles, I believe that the growth of the company can be sustained for a longer period of time, as the automotive revolution may bring about drastic changes in the automotive industry in this decade. After considering all these factors, I believe that this acquisition can act as a major catalyst to accelerate the company’s growth by enhancing its capabilities in the competitive marketplace.

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What is the main risk facing APTV?

Raw Material Availability

The company uses various raw materials for production, such as electronic components, semiconductors, petroleum-based resins, chemicals, copper and other materials. Reasons such as mechanical breakdowns, strikes, fires, explosions, power outages, or logistical complications due to climate change, weather, delayed customs processing, and natural disasters may cause supply disruptions of such raw materials and increase the prices of raw materials. raw Materials. Additionally, this disruption can lead to decreased production and shipping levels, which could increase your operating cost and put further pressure on the company’s profit margins. Also, if there is a delivery delay, customers may try to recover all of their expenses from the company, which can lead to reduced profit margins.

Valuation

The company recently acquired Interconnect Solutions, which may enhance the company’s capabilities for years to come. I believe this acquisition can drive growth and strengthen APTV’s position in a competitive market. After considering all of these factors, I estimate the company’s earnings per share for fiscal 2023 to be $5.08, giving a forward P/E of 17.82x. The company’s forward P/E ratio is higher than its industry median of 12.98x. However, the company has always shown a tendency to trade above the sector median, as APTV’s 5-year average P/E is 32.95x. The growing demand in the automotive market market can lead to an increase in the costs of raw materials and put pressure on profit margins. Therefore, I believe that the company could trade below its 5-year average in the coming years. After considering all these factors, I estimate that the company could trade at a P/E ratio of 27.5x, giving a target price of $139.70, which represents a 54.3% advantage over the current stock price. $90.54 shares.

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conclusion

The electric vehicle market is expected to grow greatly in this decade, which has intensified competition in the industry. Identifying the need to compete in the marketplace, the company recently announced the acquisition of an 85% equity stake in Intercable Automotive Solutions. Its capabilities can benefit the company to gain a competitive advantage and further accelerate its growth. The company is exposed to the risk of supply chain disruptions that may further increase raw material prices and decrease production levels. The company’s forward P/E ratio is higher than its industry median of 12.98x. However, the company has always shown a tendency to trade above the sector median, as APTV’s 5-year average P/E is 32.95x. After analyzing all the above factors, I assign a purchase for APTV.

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