Cashing in on change in the auto industry

Written by Seb Beloe on 13th Nov 2018

Seb Beloe of WHEB Asset Management explains why he is keeping a close eye on developments in the auto industry and why one firm has caught his eye in particular.

The automobile industry is experiencing a period of extraordinary change. The death of diesel and the growth of hybrid and electric cars, the market shift to emerging economies and the dawn of autonomous vehicles, are all making this a very challenging period for automobile manufacturers.

It is, however also creating enormous opportunity for component suppliers that are on the right end of these technological shifts.

Aptiv (NYSE: APTV) is one such supplier. Once part of the mighty General Motors, Aptiv emerged as a stand-alone company in 2017 with an explicit ambition to enable and benefit from key technological trends in the automotive industry. Enabling vehicles to be ‘safe, green and connected’ is the company tag-line, and it neatly summarises their areas of expertise.

Aptiv specialises in providing the architecture for electrified power trains as well as the sensors and software that underpin greater levels of automotive autonomy and safety. In fact, Aptiv has partnered with Lyft to provide a fleet of 75 self-driving cars in Las Vegas. Self-driving vehicles hold out the promise of radical improvements in vehicle safety along with lower environmental impact.

Aptiv is at the forefront of the automobile industries’ changing landscape and we have invested in the stock for the following reasons:

  1. High quality operator that is enjoying revenue growth well in excess of the wider automotive market. Aptiv has delivered a 5 year sales CAGR of 4.6 per cent but this has accelerated to 9 per cent in the past two years.
  2. Product portfolio that matches the key technological shifts in the industry. The company derives approximately 75 per cent of its revenues from either electrical distribution systems or from active safety technologies.
  3. Industry leader with c.20 per cent market share in electrical systems and c.15 per cent market share in active safety technologies.

The company’s valuation is also reasonable we believe. Given the outsize growth opportunity and attractive margins of around 13 per cent, the company trades on a 15 times price to earnings ratio and 10 times Enterprise Value/EBITDA – both in-line with its five year historical averages.

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