KeyBanc Upgrades Auto Suppliers Adient, Delphi

Changes in earnings expectations for auto seat maker Adient PLC ADNT and new management with a strong improvement plan at car propulsion system company Delphi Technologies PLC DLPH have led KeyBanc Capital Markets to upgrade ratings on both stocks.

The Analyst

KeyBanc’s James Picariello upgraded both stocks from Underweight to Sector Weight.

The Thesis

Picariello initiated coverage in December on both companies and wasn’t favorably impressed with the prospects for either stock. But the earnings backdrops have changed for both, with the consensus earnings per share expectation now down 30 percent at Adient and 10 percent at Delphi.

Adient now looks better from a risk-reward perspective, and also appears likely to avoid a debt covenant violation, Picariello wrote in a note.

At Delphi, which Picariello said in December needed a “new story” for investors, there appears to now be strong investor support for new CEO Rick Dauch, “who has outlined an encouraging road map to improve DLPH's operations over the next 12-24 months,” he wrote.

Related Link: Oppenheimer: Electrification Will Galvanize Delphi, Drive Outperformance

Macro Environment

KeyBanc remains cautious on the near-term global light vehicle demand outlook, with lower sales in the United States and China, and underlying weakness in Europe. But Picariello said those concerns appear now largely accounted for in the share prices for the two companies.

“U.S.-China trade negotiations are a notable ‘swing factor’ to sentiment and could be one step closer to a resolution, following China's passing of a law last Friday to protect foreign investment and IP/tech,” Picariello noted.

Price Action

Adient shares were up 2.93 percent to $14.38 on Monday morning. Delphi stock was trading 1.63 percent higher at $19.33.