Description

Who wants to short a zippy growth stock trading at 13x street eps? What about the Motorola of autos? Meet Visteon. The company spun out of the blue oval in 2000 before going bankrupt in 2009. The company emerged from bankruptcy and after divesting it's climate and interiors businesses acquired an electronics business from JCI in 2014 (you know, where Adient came from?) hence becoming a sexy pure play auto tech company. What do they make? Well, 40% of revenues come from the manufacture of dials which tell you how fast you’re going, 19% of revs are LCD display panels (you know, the things Samsung and LG make?), 23% of revenues are audio and infotainment (on its way to 0%) and 18% is “other,” aka stuff that is either too small to matter or is going away and they’d rather not you bring it up (analog clock on your dashboard anyone?). Revenues grew (in reverse) in 2015, 2016, 2017 and they’re going to put up a (negative) growth year in 2018 too. Let’s look at their core products in more detail.

Instrument clusters are 40% of revenues. The cluster business (yep, the dials which tell you your RPMs and that your car was supposed to be serviced 5k miles ago) is a great business. Ok maybe not, but they only have 10 competitors (excluding 23% of the market vying for more share). I guess anyone can buy some auto grade materials from MMM and slap it on a dashboard. Anyways there are digital displays hitting the market (2% of industry currently) and Visteon is optimistic you and your friends will fork up an extra couple hundred bucks to have a digital display there (or you could put it towards automatic emergency brakes that will save your life, either or).

Display is 19% of revenues. Cockpit displays are getting larger and are going to be made by LG and Samsung (Yep, Samsung bought Harman). Display revs were -14% in 1Q and -14% in 2Q 2018. Market share isn’t great but at least there are less competitors than in the above business that is 40% of revenues.

The infotainment business did $440mm of revenues in 2017 and is arguably their least commoditized business. Unfortunately it’s a competitive market.

Visteon did $535mm of business with Mazda in 2017 (17% of Visteon revenues). If you divide Visteon’s revenue with Mazda by total Mazda units produced globally you get a content per vehicle of $390 per car. This CPV is second to only JLR (you know, the company planning to idle plants due to Brexit?) in which Visteon does CPV of $424 per unit and Ford at $148 per unit. After that the average drops to the low $40s due to both penetration and mix. While we used to get infotainment revenues by quarter the company stopped disclosing in 2018 and instead chose to start lumping them in with audio revenues. But we did get some exciting news before the company stopped breaking out this segment.

August 29th, 2017: https://carbuzz.com/news/toyota-and-mazda-join-forces-to-create-new-infotainment-system 

Here’s what the Visteon CEO said when they were asked on their 3Q17 earnings conference call by an astute junior sell-side analyst: 

Analyst: “Okay. And then just second question here. Toyota Mazda posted capital tie-up. They've announced they're collaborating on a connected car infotainment platform, supposedly in of charge navigation, music, video, smartphone. I guess it's utilizing Linux and its being developed by just Toyota, just wondering how this could potentially impact Visteon's content with Mazda. I believe Mazda is your second largest customer..”

Sachin Lawande, President and CEO: “Yes, so first I would say that Mazda is a very important customer for Visteon and we have a very strong

relationship that goes over a number of years. And as you know we supply that infotainment systems today and we continue to upgrade the capabilities of this infotainment system to make it more market competitive with features such as CarPlay and Android Auto which are demanded by the market today.

We launched a new version of the system in the market earlier this year and we are working on a upgrade for launching the market for next year. And we continue to ship the system and we expect to be continuing to ship it for several years going forward. We've also expanded our relationship with Mazda with an instrument cluster win that the launch in the second half of 2018.

So, overall, the relationship is strong -- continues to be strong. This Mazda's relationship with Toyota, we are not really in a position to comment a whole lot on it and we'll have to wait and see if there's any impact to our business in the future.”

Hmm. Well looks like the CEO (and his fellow employees) decided not to wait and see. They started dumping.. and dump they did. I took the chart back a few years as I think its important to show they were not always dumpers of their stock. For some reason right around September 2017 (yep, month after the above article published and before they decided to stop breaking out infotainment revenues/ bookings in 1Q18) they turned into newfound dumpers.

Not that bad? Well there’s also this..

https://www.automotive-fleet.com/305504/ford-developing-new-mobility-solutions-infotainment-system-in-china%EF%BB%BF

Yep, another big customer developing an infotainment system without them. Not to worry, Ford is only 28% of Visteon revenues.

Additional Concerns:

1. Tariffs: The company sourced $62mm of inputs (mostly LCDs and circuit boards) from China in 2017. This is obviously going to hurt.

2. Earnings Quality: In addition to the above issues, the earnings quality is terrible, scoring a 16 out of 100 in Wolfe Research’s Earnings Quality Screen, with issues being a) days accrued, b) sales growth rate, c) eps growth rate, and d) Change in DIO.

3. CFO revolving door..

4. Employee Defections.

Catalyst

Continued competitive headwinds, SAAR weakness, tariff headwinds, earnings revisions