Nathan Slaughter of The 100% Letter writes that industry tailwinds could boost this company’s sales almost 40% by 2016.
Delphi Automotive (NYSE: DLPH) is one of the nation’s largest automotive suppliers. If you drive a Ford Explorer or Toyota Camry (or most other makes and models for that matter) odds are good that one of this company’s products can be found somewhere in your vehicle.
If you’ve been new-car shopping lately, you’ve probably noticed that cars are becoming more computerized than ever before. It used to be that only luxury cars were outfitted with Bluetooth technology, voice recognition, GPS navigation, hard drives and satellite radio. Today, these features are becoming standard even on lower-end models.
All of this plays right into Delphi’s strengths. The company is a leader in integrated audio, video and navigation systems that keep drivers informed and entertained while on the road. It also makes the complex cables, wires and electrical centers that keep all of these systems running smoothly.
And that’s only one part of the business. Delphi supplies a wide range of critical components from ignition controls to battery sensors to powertrain systems. And it’s responsible for critical safety mechanisms (such as collision warning systems) designed to protect occupants.
These advanced safety features aren’t just popular with consumers: they are required by law. Not many companies are fortunate to have Uncle Sam require customers to buy and install their products. And U.S. cars are the world’s safest, due in part to automakers’ compliance with strict mandates and regulations.
Delphi is right at the center of several converging trends that are pushing the auto industry to build vehicles that are safer and more connected and fuel-efficient than ever.
And few rivals have the size, scale and expertise to compete with Delphi on a global level. The company has 110,000 employees working in 140 manufacturing facilities. And every day it ships 60 million parts to 23,000 customers around the globe. Remarkably, 99.5% of those shipments are delivered on time and defect-free.
Delphi generates most of its business in North America and Europe. But the company has a strong and growing presence in faster-growing markets throughout Asia and South America, which now account for one-quarter of the firm’s sales.
And those sales are picking up nicely.
As I mentioned earlier, revenues are projected to climb briskly — about 9% annually over the next few years. That would lift sales to $22 billion by 2016 from $16 billion today. That top-line growth rate will easily outpace the expected increase in costs over the same period, allowing earnings per share to expand even faster — about 18% annually, or 95% cumulatively over the next 48 months.
Between now and then, Delphi is expecting to generate $9 billion in total cash flows. Some of that will help fund new high-return growth initiatives. But the rest will be returned to stockholders via dividends and share buybacks.
Closing Arguments:
As a trusted partner to giant car makers such as General Motors, Delphi is reaping the rewards of the strengthening auto market.
The firm’s innovation is on display as today’s tech-enabled vehicles require sophisticated electrical architecture.
Risks to Consider: Suppliers such as Delphi are under constant pressure from automakers to lower costs, in some cases signing supply agreements with built-in price decreases each year.
Action to Take : Delphi has hungry customers, industry tailwinds, expanding margins, a new dividend, and over $1 billion in cash reserves. And new business bookings are racing higher, increasing to $26.3 billion in 2012 from $23.5 billion in 2011.
II am putting DLPH at the top of my watch list and consider the stock undervalued; it has a price-to-earnings growth ratio (PEG) of 0.6, an attractive buy at prices below $45.
—Nathan Slaughter, The 100% Letter, April 2013