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Valeo Still Outgrowing The Market, But Investors Stung By Weak Guidance

Stephen Simpson profile picture
Stephen Simpson


  • Valeo's fourth quarter results were better than expected, with improving performance relative to underlying auto production and better than expected margins.
  • Guidance was weaker than expected and confusing, with management guiding about 7% below the Street on "conservative" assumptions that seem to imply lower content-per-vehicle.
  • Valeo has logged some early wins on hybrid/EV models, but management really needs to deliver on more EV wins in 2021 to shift sentiment.
  • Mid single-digit revenue growth and mid-to-high single-digit FCF growth can support a fair value 30% above today's price, but management has to deliver on content growth, EV wins, and margins.

The fourth quarter/second half earnings and 2021 guidance from Valeo (OTCPK:VLEEY) (FR.FR) seem like a Rorschach test of sorts for analysts and investors. If you liked the company/stock/story before, you'll find reasons to keep liking it as auto production recovers in 2021. If you didn't like it, you'll find reasons to stay negative, particularly on a pretty weak guide for 2021 revenue.

I'm in the former camp, as I feel Valeo's leverage to EV/hybrid launches and trends like advanced ADAS still don't get full credit as the company incurs the costs today for greater revenue and margins down the road.

These shares have risen about 17% since my last update, a very mediocre performance next to peers like BorgWarner (BWA), Continental AG (OTCPK:CTTAY), and Faurecia (OTC:FAURY), particularly after the earnings report. At this point I still see these shares as meaningfully undervalued, but I do note that Valeo management has to start delivering better results to change the tone, particularly with respect to EV wins in 2021.

Business Is Recovering…

Valeo reported fourth quarter and second half results that were better than expected, with better profitability and free cash flow generation relative to the company's early release in mid-January. As a reminder, Valeo reports detailed financial results only twice a year, with quarterly revenue updates in between.

Fourth quarter revenue showed a return to growth, with like-for-like revenue up 4% to EUR 5B, about 1% better than expected. Valeo's Original Equipment revenue rose better than 5% (to EUR 4.2B), outgrowing underlying production by about 200bp as the company starts to recover from some headwinds including launch delays. Aftermarket revenue declined about 2% to EUR 0.5B.

By segment, Comfort and Driving Assistance revenue rose 7% to EUR 0.98B, beating production by 400bp. Powertrain rose 5% to EUR 1.3B, beating by 200bp, but it remains to be seen if

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I am/we are long BWA, VLEEY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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