BorgWarner Makes A Bold M&A Move

I didn’t see this one coming.

Yes, I thought, and wrote, that the auto supplier industry was likely to see consolidation, particularly in areas like internal combustion engine (or ICE) components, where pressures from eventual hybrid/electric adoption and R&D were going to reward scale. I likewise thought there’d eventually be consolidation in hybrid/EV-related components, as companies who waited too long to move (or made the wrong moves) tried to correct.

Still, while it makes a great deal of sense to me, I didn’t expect BorgWarner (BWA) to pony up and acquire Delphi (DLPH). Part of the reason was that I expected a negative reaction from investors, and that’s exactly what BorgWarner shares saw after the deal, but also because BorgWarner management had been pretty adamant that they had what they needed in terms of hybrid/EV positioning.

I like this deal. I like the synergy in combustion powertrain, and I like the synergy in hybrid/electric, where Delphi’s power electronics business (inverters in particular) meaningfully improves BorgWarner’s leverage to BEVs. The market clearly doesn’t like the deal, and while there will be plenty of execution challenges and risks, I’d buy BorgWarner on this weakness.

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BorgWarner Makes A Bold M&A Move

Delphi Technologies Dinged By Near-Term Challenges

There has been quite a bit of variation in the fortunes of leading powertrain suppliers this year, as Valeo (OTCPK:VLEEY) and BorgWarner (BWA), two companies I’ve written favorably about, have performed noticeably better than Delphi Technologies (DLPH). While I believe some of this can be tied to inflated past optimism about Delphi’s merits as a fuel efficiency and EV play, the reality is that Delphi’s recent performance has been lackluster, with worsening trends relative to the improvements at BorgWarner and Valeo.

A lot of sell-side ink has been spilled on which company (or companies) have the best components for hybrids and electric vehicles, but the reality will be that no one company dominates the market, or at least not for long. To that end, I believe Delphi is likely to be a long-term winner in the market, and I believe the current share price reflects a great deal of the near-term risk to weaker vehicle production rates and slower hybrid/EV migrations, but not much upside from that eventual migration.

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Delphi Technologies Dinged By Near-Term Challenges

Valeo Stuck In A Construction Zone, But An Attractive Highway Awaits

This has been a challenging year for French auto parts supplier Valeo (OTCPK:VLEEY

, VLOF.PA). With recent disappointments in the company’s revenue growth and ongoing investments in electric vehicle (or EV) and driver assistance technologies pressuring margins, the shares haven’t performed quite as well as investors might have hoped. What’s more, there are near-term challenges like the status of Korean OEMs within China that could continue to pressure revenue in the short term.

Even so, I believe these are short-term impediments to a strong long-term story. Along with rival Continental AG (OTCPK:CTTAY), Valeo is carving out a strong position in the emerging EV ecosystem, and the company is well placed to capture significant content share in hybrids and pure electrics. Other opportunities like driver assistance remain attractive as well, with Valeo having an uncommonly broad technology footprint. A long-term target of 8% revenue growth and low-teens free cash flow growth is hardly conservative for any established auto parts company, but I believe Valeo’s leverage to EVs and ADAS can support it, and those projections in turn support a fair value about 10% higher than today’s price.

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Valeo Stuck In A Construction Zone, But An Attractive Highway Awaits