Why Delphi Automotive Is Likely Poised For Solid Upside

Jun.17.12 | About: Delphi Automotive (DLPH)

Delphi Automotive (NYSE:DLPH) is one of the largest automotive component suppliers in the world. The stock has returned 33.80% since its IPO in November 2011, but declined 10.03% over the past 3 months driven primarily by the overall equity market weakness and lockup expiration. At the current price of $28.54, it has a market capitalization of $9.4B. The stock trades at 4.79x the LTM EBITDA and 7.56x the current fiscal year estimated EPS. I am bullish on the stock and believe DLPH currently represents the best automotive supply play based on the following reasons:

  • Analysts predict top line to grow at 2.4% and 9.2% over FY2012 and FY2013, and EPS to rise significantly by 39.2% and 12.1% over the same horizons. Taking those growth prospects into consideration, DLPH is trading at a 3-year expected PEG of 0.31x, suggesting a substantial discount to the growth potential.
  • The stock is trading at a lucrative valuation. According to the comparable analysis below, DLPH outperforms its industry peers across all growth, profitability, and free cash flow metrics, and only has an above-average debt level. Given the firm's relatively excellent performance and solid market position, a valuation premium of 10-20% on top of the group average P/E and EV/EBITDA multiples should be warranted. With a 15% valuation premium, the relative valuation model yields a fair stock value of $35, implying a solid 23% potential upside.

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  • Despite the highest debt level, DLPH's balance sheet remains solid. As at Q1 2012, the company is sitting on $1,412M cash and $2,085 debt, amounting to a net debt position of only $673M. Both the current and quick ratios are very healthy at 1.6x and 1.1x, respectively. Its LTM interest coverage of 11.2x suggests the firm has no problems in servicing the debt.
  • Analysts are very bullish on the stock. Of the 12 ratings, there are 5 strong buys, 6 buys, and 1 hold. The mean target price is $37.50, representing a 32% upside.
  • According to the table below, estimated FY2012 and FY2013 EPS trends are solid. There are multiple upward revisions over the past 90 days and only a slightly downward revision recently.

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EPS table is sourced from Yahoo Finance, Comparable Analysis table is created by author, and financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, Thomson One, Bloomberg and Morningstar.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DLPH over the next 72 hours.