Description

Overview

Delphi Automotive (DLPH) is an OEM supplier focused on electrical architecture, powertrain, safety electronics, infotainment, and thermal solutions. Through a lengthy bankruptcy process that began in 2005, DLPH transformed itself from a collection of disparate businesses into a secular grower with a low cost structure, high technology products, diverse customer base, major presence in emerging markets, clean capital structure, and negligible legacy liabilities. 

Despite having the lowest level of pension/OPEB liabilities vs. peers, 0.2x net leverage, and highest ROIC, DLPH continues to trade like a commodity OEM supplier. Although DLPH has been among the best performing stocks in the sector over the past year, we still believe the market is not giving the company enough credit for its long-term growth prospects and margin expansion opportunity. DLPH is often bucketed among lower-quality peers such as AXL, DAN, and LEA vs. BWA, which benefits from similar secular growth, cost structure, profitability/defensible margins, and proprietary technology. On a P/E basis, DLPH trades at a 40% discount to BWA, and we believe the gap will narrow as DLPH continues to prove its margin sustainability and product viability.

CEO Rod O’Neal

As COO in 2005, Rod understood that DLPH could not survive under its existing cost structure. He proactively took the company into bankruptcy and eliminated their UAW workforce, while rationalizing the business to focus on the three mega trends of connectivity, safety, and green. In doing so, he took the company from 119 product lines to 33 and from 7 business units to 4, reduced the global avg. hourly wage cost from $15 to $7, increased the temporary workforce from 15% to 26%, and reduced legacy benefit obligations from $12.5bn to $700m. Under O'Neal leadership, DLPH is now a lean and focused organization with tremendous FCF generation potential and a major competitive benefit via its highly flexible and structurally low cost workforce.

Secular growth – connectivity, safety, green

• Connectivity – “always connected consumers” are seeking better infotainment systems and reconfigurable displays. Increasing electrification of vehicles drives content per vehicle – in five years' time, the average vehicle will have 25% more cut leads, 25% more connectors, and over 50% more wiring
• Safety – regulation is driving demand for active safety technologies that detect driver threats, address driver distraction, and improve reaction time. Penetration of advanced safety features in cockpit displays are beginning to proliferate, especially for premium vehicles
• Green – consumer desire for fuel economy improvements and regulatory-driven emission reductions. Downsizing of engines, growth in direct-injection gas/diesel engines, and global emission standards

Summary Financial Estimates (incl. MVL and $750m of annual buybacks)

 Divisions/products

• Electrical Architecture (42% of 2012 sales) – wiring harnesses, cables, connectors, data connectivity systems
• Powertrain (30%) – fuel injection, combustion systems, electronic controls, fuel pumps & valves
• Electronics & Safety (18%) – infotainment, driver displays, wireless connectivity, reception systems
• Thermal (10%) – HVAC systems incl. compressors, evaporators, heat exchangers

Capital allocation

• Buybacks – new $750m authorization on top of $300m of stock repurchased in Q2 and Q3’12; we're modeling $750m per year going forward
• Dividends – company may initiate a regular dividend in 2013
• Acquisitions – 2012 ~$970m MVL acquisition is ~$0.25 accretive to EPS and improves margins; future bolt-ons acquisitions expected
• Restructuring – new ~$250m plan will generate annual cost savings of ~$150-$180m by 2014

Risks

High European exposure – 45% of sales derived from Europe with future production cuts expected, therefore, company may lower guidance

Pricing pressure – beyond contracted step-downs, OEM production pressures = constant effort to squeeze suppliers

Significant exposure to GM – 25% of sales

Currency translation – +/- 10% change in EUR has ~$65m EBITDA impact 

Raw material exposure – +- 10% change in copper price has ~$12.5m EBITDA impact 

Catalyst

Initiating of regular dividend

Increasing content per vehicle

Margin expansion

Future accretive M&A

Cost savings