KeyBanc Looks For Winners And Losers In The Auto Parts Space

KeyBanc analysts looked into the crowded auto parts and equipment space.

The Analyst

KeyBanc Capital Markets' James Picariello on Tuesday initiated coverage of the following:

• Adient PLC ADNT at Underweight, $18 price target.
• Aptiv PLC APTV at Overweight, $95 price target.
• Autoliv Inc. ALV at Overweight, $105 price target.
• Dana Inc DAN at Overweight, $18 price target.
• Delphi Technologies PLC DLPH at Underweight, $13 price target.
• Lear Corporation LEA at Overweight, $178 price target.

Here are few highlights on each stock, according to Picariello.

Adient: Major Transformation Need

• Adient's new CEO Doug DelGrosso could oversee a successful turnaround, but doing so will likely take a long time and comes at a time of weakening global light vehicle sales.
• The company could find a buyer for its China JV Seating business to unlock shareholder value, but there's no sign this will happen soon.
• Shares are down 73 percent in 2018 with reasons to justify the weakness "growing in number."

Aptiv: Focus On 'SACREd' Products

• Aptiv boasts the highest degree of exposure to the "SACREd" segment of the automotive market, including Shared, Autonomous, Connected, Resized and Electrified driving.
• Aptiv's prospects has yet to be fully appreciated by the Street, which implies the potential for upside estimate revisions and a higher multiple for the stock.
• The company has already established multiple "critical partnerships," which will help in solidifying a leadership position.

Autoliv: Overall 'Formidable' Company

• Autoliv is the clear No. 1 supplier of passive safety products, which makes it a "formidable" company that's well positioned for the future.
• The company's 50 percent order intake win-rate over the past four years is particularly attractive as initial launch costs have already been absorbed.
• Autoliv should generate a mid-teens annualized EPS growth through 2020, which implies shares are undervalued today at just seven times EV/EBITDA on 2020 estimates.

Dana: Overdone Concerns

• Investor concerns relating to the cyclical cycle nature of the business aren't justified given a favorable backlog.
• The company's acquisition of TM4 and Oerlikon are both highly strategic and offers exposure to the electrification segment.
• Shares of Dana are trading near historical tough levels at just 3.8 times EV/EBITDA, which is one turn below the peer average.

Delphi: 'New Story' Required

• Expectations for strong revenue growth and margin expansion from the 2017 Aptiv spin hasn't played out.
• Delphi needs to present investors a "new story" to prevent further downward earnings revisions and multiple contraction.
• The company's fastest growing verticals (GDi and Power Electronics) are unlikely to reach breakeven until 2020.

Lear: Impressive Metrics

• Lear isn't getting enough credit for its impressive 14 percent free cash flow yield and 22.5 percent average return on invested capital over the past five years.
• The company is among the best positioned to benefit from electrification and remains a premium seating supplier in luxury SUV and CUVs.
• Lear's stock is trading at a 5 to 10 percent discount to its peers on EV/EBITDA and P/E multiples.