Sunday, April 24, 2016

Seeking Alpha: Denso Needs To Diversify To Maximize Its Opportunities

As one of the biggest auto component suppliers in the world, Denso's (OTCPK:DNZOY) (6902.T) basic operating environment isn't all that much different than that at Continental AG (OTCPK:CTTAY), Valeo (OTCPK:VLEEY), Bosch, Delphi (NYSE:DLPH), BorgWarner (NYSE:BWA) and so on. Major trends like electrification, fuel efficiency/emissions, and driver assistance loom large when considering Denso's future growth. On the other hand, Denso's reliance on Toyota (NYSE:TM) is a notable difference, and I'm not sure Denso has shown it has the products/technology to clearly stand out from the crowd - at least in the initial launch windows for many of these technologies.

Given its different product, customer, and technology exposures, I'm expecting less revenue growth from Denso than I am from BorgWarner, Continental, Delphi, and Valeo over the long term, but that's not to say I don't like the company and a long-term revenue CAGR of 5% isn't exactly soft by auto supplier standards. I do expect some margin uplift as Denso moves beyond significant start-up/launch expenses, but improving its gross margin and free cash flow efficiency would be a welcome positive driver. Denso looks undervalued enough to consider, but I can't call it my favorite name in the sector on the basis of underlying company quality.

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Denso Needs To Diversify To Maximize Its Opportunities

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