I really liked your thesis on Aptiv. It's curious how the market sometimes contradicts itself. While palladium is cheap due to expectations that the EV transition will be fast, eliminating demand for palladium catalytic converters, Aptiv is trading cheaply because investors believe this transition will take longer than expected.
My main concerns about Aptiv are the following:
Margins seem to be deteriorating quite rapidly, from a 22.4% gross margin in 2016 to 18.5% in 2019, and now sitting at the same level as in 2019. Rising competition could be a significant concern for the company.
I'm unsure to what extent this business is affected by the cyclicality of the automotive sector. Is the company more or less affected than other automotive companies during market downturns?
There are a few key factors contributing to this margin deterioration:
1/ Slowing Demand for Electric Vehicles, particularly in North America and Europe. This shift in customer mix and reduced EV sales has pressured margins.
2/ The company has been dealing with persistent labour cost pressures and material cost inflation. Higher commodity prices, particularly for materials like copper, have increased Aptiv's production costs. These rising input costs have squeezed margins. This is a macro economic thing that has impacted every company over the past few years.
3/ A strong Mexican Peso and weaker Chinese Yuan have also contributed to tighter margins as these are unfavorable foreign exchange moves for Aptiv.
To combat these margin headwinds, Aptiv has been implementing several initiatives:
The company is realizing benefits from prior cost-cutting actions and is continuing to implement cost-saving measures throughout 2024. It is also focusing on optimizing its manufacturing footprint to improve efficiency. For instance, it is rotating engineering resources to best-cost locations to reduce overall engineering spend as a percentage of sales.
Inflation now seems to have settled down relative to where it was only a year or two ago, so that macroeconomic headwind is likely to have lessened.
However, the industry challenges relating to EVs are entirely beyond Aptiv's control. The problem has been the prohibitive prices of EVs which has prevented widespread adoption - many people have suffered cost of living pressures due to the recent inflation challenges and so have retained their old ICE vehicle rather than upgrading to an EV. This is an issue for the automotive OEMs more than Aptiv, as they are trying to transition away from ICE - so they need to work out a way to make their EVs more affordable. Otherwise alternative technology such as hydrogen powered cars will take over (Toyota already has a hydrogen car on the road). Either way, much of Aptiv's technology will still be integrated in the vehicle, so I don't see it as too much of an issue, just a cyclical blip. It is the reason that the shares are available at a discounted price, so for new investors, this is arguably good news rather than bad news.
I really liked your thesis on Aptiv. It's curious how the market sometimes contradicts itself. While palladium is cheap due to expectations that the EV transition will be fast, eliminating demand for palladium catalytic converters, Aptiv is trading cheaply because investors believe this transition will take longer than expected.
My main concerns about Aptiv are the following:
Margins seem to be deteriorating quite rapidly, from a 22.4% gross margin in 2016 to 18.5% in 2019, and now sitting at the same level as in 2019. Rising competition could be a significant concern for the company.
I'm unsure to what extent this business is affected by the cyclicality of the automotive sector. Is the company more or less affected than other automotive companies during market downturns?
Thank you for the questions Hugo.
There are a few key factors contributing to this margin deterioration:
1/ Slowing Demand for Electric Vehicles, particularly in North America and Europe. This shift in customer mix and reduced EV sales has pressured margins.
2/ The company has been dealing with persistent labour cost pressures and material cost inflation. Higher commodity prices, particularly for materials like copper, have increased Aptiv's production costs. These rising input costs have squeezed margins. This is a macro economic thing that has impacted every company over the past few years.
3/ A strong Mexican Peso and weaker Chinese Yuan have also contributed to tighter margins as these are unfavorable foreign exchange moves for Aptiv.
To combat these margin headwinds, Aptiv has been implementing several initiatives:
The company is realizing benefits from prior cost-cutting actions and is continuing to implement cost-saving measures throughout 2024. It is also focusing on optimizing its manufacturing footprint to improve efficiency. For instance, it is rotating engineering resources to best-cost locations to reduce overall engineering spend as a percentage of sales.
Inflation now seems to have settled down relative to where it was only a year or two ago, so that macroeconomic headwind is likely to have lessened.
However, the industry challenges relating to EVs are entirely beyond Aptiv's control. The problem has been the prohibitive prices of EVs which has prevented widespread adoption - many people have suffered cost of living pressures due to the recent inflation challenges and so have retained their old ICE vehicle rather than upgrading to an EV. This is an issue for the automotive OEMs more than Aptiv, as they are trying to transition away from ICE - so they need to work out a way to make their EVs more affordable. Otherwise alternative technology such as hydrogen powered cars will take over (Toyota already has a hydrogen car on the road). Either way, much of Aptiv's technology will still be integrated in the vehicle, so I don't see it as too much of an issue, just a cyclical blip. It is the reason that the shares are available at a discounted price, so for new investors, this is arguably good news rather than bad news.
Most of the answers I have given you are from this document: http://q4live.s22.clientfiles.s3-website-us-east-1.amazonaws.com/336558720/files/doc_presentations/2024/05/Aptiv-Q1-2024-Earnings-Presentation.pdf and from the Aptiv IR website if you want to do more background reading.
I hope that this answers your questions.