Visteon (VSTO.OB) is an undiscovered opportunity with a number of catalysts which will drive performance of the stock over the next few months. I own the stock in my portfolio and have followed the company closely throughout its Chapter 11 process over the past 18 months. The stock has been under the radar screen since it emerged from Chapter 11 in October, but it won't be for long. Near term catalysts which will drive performance in my view are listing on the NYSE and forthcoming research.
Formerly Ford’s (F) captive automotive parts supplier (spun out in 2000), VSTO has diversified its customer base, lowered its unit labor costs significantly, and transformed itself from a low growth, mostly U.S. and Western European business with poor margins to a high-growth company with two-thirds of the enterprise value coming from its Asian operations. Ford now represents less than 30% of total revenues and Hyundai is the second-largest customer, representing 27% of total revenues. I like this customer base since Hyundai continues to gain share globally and Ford is outperforming the other Big 3 OEM’s. I also like the fact that over 40% of revenues come from its Asian operations when accounting for the nonconsolidated JV’s, which have been experiencing dramatic top-line growth and margin expansion. Valuing the Chinese business at a conservative 10x earnings, you’re getting the core business for free.
VSTO’s plan of reorganization was confirmed on August 31 and became effective on October 1. Visteon, which had been under pressure as a result of the credit crisis and global economic slowdown, elected to file for Chapter 11 in May 2009 to right size its capital structure (VSTO will emerge with zero net leverage and excess cash), change its operating footprint, streamline its business and improve operating performance. Chapter 11 allowed the company to reject unprofitable contracts and exit undesirable businesses.
Visteon’s operations are organized into three product groups: Climate, Electronics, and Interiors. The Climate Product Group designs and manufactures fully-integrated heating, ventilation, and air conditioning (“HVAC”) systems, as well as powertrain cooling systems which provide cooling and thermal management for a vehicle’s engine and transmission. The Electronics Product Group produces a wide range of in-vehicle information and entertainment systems, as well as electronic climate controls, integrated control panels, powertrain and feature control modules, and lighting. The Interiors Product Group produces a variety of cockpit modules, door panels, interior trim products, and console modules. Visteon is a Tier 1 supplier and has stated it is a market leader in each of its core product groups.
VSTO trades at just 4.1x 2011 EV/EBITDA on a consolidated basis, and it is even cheaper when isolating Core Visteon in a sum-of-the-parts analysis. In my opinion, it is the least expensive way to play the global auto supplier group. The mean 2011 EV/EBITDA multiple for comparable companies is 5.5x using consensus estimates from Bloomberg. Using a conservative base case 2011 EV/EBITDA multiple of 3.75x for Core Visteon in a Sum-of-the-Part Valuation implies a base case share price of $84, representing an increase of over 30% from current levels.
Disclosure: Author holds a long position in VSTO.OB