Aptiv: Acquisition of Intercable Automotive to Accelerate Growth (NYSE: APTV)

gorodenkoff

Investment thesis

Aptiv PLC (NYSE:APTV) is a global technology architecture and mobility company with a primary focus on developing solutions for the automotive industry. The company recently announced the acquisition of an 85% stake in Intercable Automotive Solution, which deals in automotive power distribution and connection technologies. I believe this acquisition can serve as a primary 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 a global automotive-focused mobility architecture and technology company. The company designs and manufactures vehicle parts and provides electronics and active safety technology solutions for the automotive and commercial vehicle markets. The company’s clientele includes the 25 largest in the world automotive original equipment manufacturers or OEMs. Its global network includes 127 manufacturing plants and 12 technical centers to serve customers worldwide. It operates in 46 countries and has 18,900 engineers, scientists and technicians who develop products adapted to the market. 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 centers and hybrid high voltage distribution and security. This segment generates 74% of the company’s total turnover. The Advanced Safety & User Experience segment offers system integration tools, critical technologies and advanced software development for safety, security, convenience and comfort in vehicles, including sensor systems, controllers multi-domain, electronic control units, vehicle connectivity systems and applications. development. The Advanced Safety & User Experience segment generates 26% of total revenue. The company is experiencing strong growth in both segments, with sales of $20.3 billion in the first half of fiscal 2022, which is 81.2% higher than the first half of fiscal 2021.

Revenue Trend Chart

Revenue trend (Investor Presentation: Slide n°: 7)

Acquisition of Interconnect Solutions

The electric vehicle market is becoming highly competitive owing to its various advantages, such as reduced emissions, growth in charging infrastructure, and low cost of batteries. This automobile revolution can create strong momentum for the growth of the industry in the coming years and provide a wide range of opportunities for companies operating in this industry. This has already led to an increase in the demand for electric vehicles due to government regulations and policies in many countries, which has intensified the competition in the market. Recognizing this opportunity, the company recently signed a definitive agreement to acquire an 85% stake stake 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 an industry leader, with estimated sales of over $250 million in 2022. It is focused on manufacturing the innovative solutions needed to meet the challenges of vehicle electrification. Its product line includes solid state power centers, battery cell interconnect systems, high voltage busbar technology and other high voltage power distribution solutions. Intercable’s technology and manufacturing capabilities will provide customers with an efficient and cost-effective vehicle assembly option, which can attract new customers for APTV. Its highly innovative product designs and relationships with major European automotive OEMs can significantly enhance the company’s position as a complete system supplier for EV manufacturers and help it gain a competitive edge in the industry. . By being very competitive in the industry and expanding its customer base, I believe that the company can increase its market share in the years to come, which can ultimately increase its profit margins. Observing the current market trends and the growing demand for electric vehicles, I believe that the company’s growth may last longer, as the automotive revolution may bring drastic changes to the automotive industry in this decade. After considering all these factors, I believe this acquisition can act as a primary catalyst to accelerate the company’s growth by improving its capabilities in the competitive market.

What is the main risk facing APTV?

Availability of raw materials

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 conditions, customs processing delays and natural disasters can disrupt supply. of these raw materials and increase the prices of the raw materials. Additionally, this disruption may lead to lower production and shipment levels, which could increase its operating costs and further strain the company’s profit margins. Additionally, in the event of late delivery, customers may seek to recover all of their expenses from the company, which may result in reduced profit margins.

Evaluation

Recently, the company acquired Interconnect Solutions which can enhance the capabilities of the company in the years to come. I believe this acquisition can drive growth and strengthen APTV’s position in a competitive market. After taking all of these factors into account, I estimate the company’s FY2023 EPS to be $5.08, resulting in a forward P/E ratio of 17.82x. The company’s forward P/E ratio is above its industry median of 12.98x. However, the company has consistently shown a tendency to trade above the industry median as APTV’s 5-year average P/E ratio is 32.95x. Growing market demand for the automotive market may drive up raw material costs and put pressure on profit margins. Therefore, I think the company could be trading below its 5-year average in the coming years. After taking all of these factors into account, I estimate the company could be trading at a P/E ratio of 27.5x, giving a price target of $139.70, which is an upside of 54.3%. against the current share price of $90.54.

Conclusion

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

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