Delphi Automotive: A Turnaround Story With Years Of +20% Returns (NYSE:DLPH)

Aug 02, 2023

Thesis

Delphi's (NYSE:DLPH) painful and controversial 4-year restructuring process transformed the company into one of the largest and leanest automotive parts suppliers. In the coming years, Delphi will benefit from increased vehicle growth in the Asia Pacific, as well as investments in environmental, wireless, and safety related technologies.

Last year, 17 of the 20 top-selling vehicles in the United States and all of the 20 top-selling vehicles in Europe had Delphi components. Assuming a 15.6% industry per annum growth rate, and an industry multiple of 18.8x, I arrive at a 2017 price estimate of $147.24. A current stock price of ~$73 would imply nearly 25% annual return over the next 3 years.

Source: Yahoo Finance

Company Overview

Delphi Automotive PLC is an international vehicle parts manufacturer. It is a private sector and publicly held business. The company owns 126 major manufacturing facilities and 15 major technical centers. The company has a presence in 32 countries and approximately 117,000 employees. The Delphi Automotive PLC is the UK-based parent company for its US subsidiary Delphi Automotive LLP.

Company History

Delphi Automotive can trace its roots to the early 1990s. General Motors (GM) decided to reorganize its business and sell off its non-core business lines. GM created the Automotive Components Group as a subsidiary, and later named the company Delphi Automotive Group in 1995. GM took Delphi Automotive public in 1999.

Cost management was an important goal during the company's early years. Delphi began moving many of its operations to low-cost production regions such as Central and Eastern Europe. It also began divesting non-core businesses. The company reoriented its investing and research activities to develop products that required lower labor costs. In 2000, the company discharged 900 European manufacturing workers, and in 2001, continued its global restructuring by reducing the global workforce by 11,500.

During the early 2000s, the automobile industry experienced a slowdown. U.S. automakers drastically cut production as a result and eliminated 5,000 jobs in Ohio alone. By the end of 2005, the company had nearly 150,000 unionized employees in the United States and a global workforce of 185,000.

In October of 2005, Delphi entered Chapter 11 bankruptcy protection. Delphi's then CEO, Robert S. Miller, decided to take the company into bankruptcy in order to eventually return the company to profitability. During bankruptcy, Delphi closed a number of its facilities, reduced product lines and transferred its pension obligations to the Federal Pension Benefit Guaranty Corporation (OTC:PBGC).

Delphi emerged from bankruptcy in 2009 with the help of hedge funds Silver Point Capital and Elliot Management. The firms forgave $3.5 billion of the firm's debt, and oversaw the divestment of some of the company's business lines to GM. In 2009, Delphi incorporated in the United Kingdom as Delphi Automotive PLC. In 2011, Delphi went public with a market capitalization of approximately $7.5 billion.

Operations and Industry

Delphi operates in the motor vehicle parts and accessories industry. Delphi is considered a "Tier 1" differing from "Tier 2" suppliers in that it distributes components directly to automobile manufacturers. The company recognizes the automobile part supply market is extremely competitive. Some of the company's competitors include Magna International (MGA), Bosch (OTC:BSWQY), and Denso Corporation (OTCPK:DNZOF).

Profit Centers

Delphi's largest and highest margin business segment is its Electronic/Electric Architecture (E/EA) division. The division produces connectors, circuits, and electrical centers among other products. Last year, the division brought in $7.9 billion in revenue, approximately half of the company's total. The profits of the E/EA division have steadily grown over the years, partly as a result of acquisitions, but also the result of expanded product offerings. In 2011 and 2012, the E/EA division had revenues of $6.6 billion and $6.8 billion respectively. In addition, Delphi dedicates 78 of the company's 126 facilities and technical centers to the division.

Source: "Company History Overview." Delphi Automotive PLC

The company's profits originate primarily from the United States and Europe. In 2013, $5.3 billion came from the United States and $6.4 billion came from Europe. A year earlier, revenues from the region were practically unchanged, $5.1 billion for the United States and $6.3 billion for Europe. Together, 71 percent of total revenue came from these two regions in 2013.

Growth Plan

Delphi identifies three major trends that are shaping the automobile industry: Safe, Green, and Connected. All over the world, consumers and governments are demanding cars that are environmentally friendly, enjoyable to drive in, and protect riders and pedestrians. Though research and engineering play an important role in developing products that capitalize on these trends (Delphi spent $1.3 billion on research last year), the company has also aggressively sought acquisitions and cost cutting.

Since its public offering, Delphi made a series of acquisitions that expands its product and customer base. These acquisitions especially benefited the Electronic/Electric Architecture and Electronics and Safety divisions. In 2012, Delphi purchased FCI Group's Motorized Vehicles Division for nearly $1 billion. The purchase expanded the company's presence in Asia and access to the safety equipment market. Recently, Delphi acquired Antaya Technologies, a provider of on-glass connectors and Unwired Technology LLC, a supplier of connectivity modules.

Source: Delphi 10-K 2013

In addition to growing its electronic portfolio, Delphi's acquisitions expand the company's footprint in China. Antaya Technologies has offices in Zhuhai, and Shanghai, China and Unwired Technology has an office in Hong Kong. Last year, the company spent $174 million in capital expenditures in the Asia Pacific region, an increase from $118 million and $155 million in 2011 and 2012. Topline growth in the region has been truly remarkable; from 2005 to 2011, revenue quintupled over $2 billion. In 2013, Asia Pacific was responsible for $2.7 billion in revenue. The region's growth is likely to continue as evidenced by bookings (an indicator of future revenue). From 2010-2013, 30 percent of bookings came from Asia. Europe and the United States constituted 35 percent and 30 percent of bookings respectively during the same period.

Conclusion and Valuation

Delphi has several growth drivers:

Analysts estimate a 15.6% annual industry growth rate over the next 5 years. Using current year 2014 EPS estimates of $5.07, I arrive at $7.83 2017 EPS. Combined with an industry multiple of 18.8x, I calculate a 3-year price estimate of $147.24. A current stock price of ~$73 would imply nearly a 25% annual return over the next 3 years.

This article was written by

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