Valeo Hammered On Sector-Wide Operational Challenges And Future EV Fears

The last seven or eight months have been brutal for tier one European auto suppliers. It's bad enough that component shortages have led OEMs to produce less than they'd like, but erratic start/stop schedules have wreaked havoc on supplier operations, and supply and labor challenges have done them no favors either.

The best thing I can probably say about Valeo's (OTCPK:VLEEY) performance since my last update is that a quick glance at Faurecia (OTC:FAURY) and Vitesco (VTSCY) shows that it could have been even worse, though all of these have underperformed American suppliers like Aptiv (APTV) and BorgWarner (BWA).

It's not smooth sailing ahead for Valeo just yet. While the company should be past the worst of the production disruptions, I expect the Street is still going to fret about losses tied to the EV development programs and the risk that EV component insourcing limits the long-term opportunity. These aren't new concerns, but there aren't many positives to offset them now. I believe that Valeo is materially undervalued here, but the company needs beat-and-raise reports (particularly on margins) to shift sentiment.

 

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Valeo Hammered On Sector-Wide Operational Challenges And Future EV Fears

Valeo Looks Undervalued On EV Assets, But Future Of Its Market Still In Flux

 

Auto production disruptions caused by semiconductor shortages and input cost headwinds have been a painful one-two punch to the gut for many auto suppliers so far this year, and Valeo (OTCPK:VLEEF) (OTCPK:VLEEY) (FR.FR) hasn’t gone unscathed despite two decent-or-better quarters since my last update. On top of the near-term concerns, bearish analysts continue to beat the drum that Valeo’s strong position in hybrid and EV components won’t matter due to widespread OEM in-sourcing for these vehicles.

I’ve never disputed that there will be in-sourcing, only that it won’t be as widespread as the bears predict and that at least a few of the OEMs pledging to in-source will change their minds when their in-sourced efforts prove inferior in the market.

I continue to believe that Valeo is significantly undervalued, but this is a story that still needs time to develop and upside is tied to ongoing improvements in order intake, particularly the high-voltage JV w Siemens (OTCPK:SIEGY). If Valeo can generate around 3.5% long-term revenue growth, with mid-to-high single-digit FCF growth, these shares are more than 50% undervalued today.

 

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Valeo Looks Undervalued On EV Assets, But Future Of Its Market Still In Flux

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

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.

 

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

A Small Q3 Pothole Creates A Pullback Opportunity With Valeo

The third quarter saw French auto supplier Valeo (OTCPK:VLEEY) (FR.FR) come up short on underlying production outperformance, the first such underperformance since the first quarter of 2018, and the market certainly didn’t like it. While a negative reaction is perhaps understandable, particularly given Valeo’s recent run of outperformance, I think it’s short-sighted in light of upgraded guidance for the fourth quarter and ongoing evidence of meaningful content wins in areas like 48V and ADAS.

I continue to like Valeo’s globally diverse business and its balanced leverage to traditional internal combustion powertrains (which will be with us a while longer), intermediate “light hybrid” solutions, and future fully-electric powertrains, as well as increasingly sophisticated ADAS systems. I also like the valuation, as the shares appear meaningfully undervalued on mid-single-digit revenue growth, modest long-term improvement in FCF margins, and near-term EBITDA margins in the 12%’s.

 

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A Small Q3 Pothole Creates A Pullback Opportunity With Valeo

Valeo Underrated By The Street As It Continues To Outperform Build Rates

With global light passenger vehicle unit sales down more than 24% year over year in the first quarter of this year, you can probably imagine how the shares of most auto parts suppliers are looking these days. Valeo (OTCPK:VLEEY) (FR.PA) certainly isn't unusual in that regard, with the shares down almost by half over the past year and down about 40% since the start of the year.

I continue to believe Valeo is a long-term winner in the evolution toward hybrid and electric cars, but the company is most definitely not out of the woods yet. It's going to take a couple of years to reach/surpass 2019 levels of revenue and profits, and there are ongoing cash burn risks with the company's JV with Siemens (OTCPK:SIEGY), not to mention valid concerns that the COVID-19 recession will push back the adoption curve of hybrids and electrics. On the other hand, this is a company that has been solidly outperforming underlying builds and has a strong hybrid/EV offering. This is a high-risk selection, but one that I think is worth serious consideration.

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Valeo Underrated By The Street As It Continues To Outperform Build Rates

Valeo Makes Its Case For Long-Term Electrification Leadership, But Analysts Still Obsessed With Near-Term Costs

“It takes money to make money” is a well-worn cliché, but the sell-side remains fixated on the R&D investments and JV losses Valeo (OTCPK:VLEEY) (FR.PA) is absorbing as part of its efforts to build a leading platform of passenger vehicle electrification technology. I can’t and won’t argue that Valeo’s margins today are great compared to peers, and I likewise won’t argue that there is still ample uncertainty as to what the long-term profitability of EV parts and systems will be, but I believe Valeo is making prudent investments to build a long-term business. Unfortunately, analysts and investors are often obsessed with the short term.

I continue to like Valeo shares, even though the stock has rallied some on strong third quarter results. With investors selling the stock after a capital markets day that didn’t adequately address concerns about near-term profitability, I think this is a name for more risk-tolerant investors to consider.

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Valeo Makes Its Case For Long-Term Electrification Leadership, But Analysts Still Obsessed With Near-Term Costs

Valeo May Finally Be Bottoming

The best I can say about Valeo (OTCPK:VLEEY) is that the shares of this French auto parts company really haven’t done much worse than the peer group over the past year, a stretch over which only a small group of stocks like Aptiv (APTV) are up, and that the company continues to outperform underlying global build rates. Valeo remains one of the least-liked companies that I follow in terms of sell-side support, with several “Underperform/Sell” ratings on the shares.

I continue to believe that the shares reflect an overly pessimistic assessment of the company’s future, particularly given the potential of its Siemens (OTCPK:SIEGY) JV for electric vehicle components, but not unlike BorgWarner (BWA), questions have arisen as to the true value of the order book and whether future margins will live up to expectations. Management appears to have almost no credibility on the Street, and I consider this a higher-risk candidate, but I believe stabilization in the global car market next year could lead to a re-evaluation of the shares.

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Valeo May Finally Be Bottoming

Valeo's Outperformance Relative To Underlying Volume May Be The Start Of The Turn

I can understand why sell-side analysts would see light at the end of the tunnel at Valeo (OTCPK:VLEEY) (FR.PA) and assume it’s an oncoming train. That’s what happens when you miss guidance for two and a half years, offer vague and unconvincing explanations of those misses, and generally make any bulls look foolish. And yet, the markets tend to have short memories if and when companies turn around their performances, so maybe, finally, my bullish thesis on Valeo doesn’t feel so foolish.

I’m not changing any of my core assumptions in any meaningful way, as there’s still a lot of “show me” to this story. Still, 5% revenue growth for a company with a strong hybrid/EV order book (if they can deliver…) and strong FCF growth (if they can deliver…) doesn’t seem out of line, and would support a meaningfully higher share price from here, even after a recent rally that has seen the stock outperform peers/rivals like BorgWarner (BWA), Continental (OTCPK:CTTAY), and Schaeffler (OTC:SFFLY).

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Valeo's Outperformance Relative To Underlying Volume May Be The Start Of The Turn

Look Past The Current Auto Weakness, And BorgWarner Has Investment Appeal

These aren’t great times for the auto sector, with U.S. auto sales down more than 5% in April, European registrations down 4% in March, and Chinese auto sales down 11% in the first quart of 2019. Against that backdrop, it’s not really surprising that BorgWarner (BWA) is seeing revenue and margin contraction.

Looking out further, though, BorgWarner’s backlog suggests that the company’s leverage to hybrids and EVs is increasing as expected, and while there is still uncertainty as to what the margins on that business will look like, I believe today’s price discounts an excessively pessimistic view. The numbers probably won’t start looking better for BorgWarner until the second half of 2019, and there is still some risk there, but I think longer-term investors may want to dig in and do their due diligence on this underrated powertrain player.

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Look Past The Current Auto Weakness, And BorgWarner Has Investment Appeal

Valeo Hits The Wall, And The Wall Falls On Top Of It

The last year was a tough one for auto parts suppliers in general, particularly after midyear and especially for European suppliers, but it was an abysmal year for Valeo (OTCPK:VLEEY) [VLOF.PA] as the shares lost about half their value on successive miss-and-lower quarters that eventually saw management's outlook for 2019 erode from double-digit growth to low single-digit growth with lower margins.

I don't believe that Valeo is fundamentally broken, but investor confidence in management clearly is, and I can't say that that is unfair. The magnitude of the guidance revisions has been significant, as has been the discrepancy with order growth and the large order write-off in China, all of which leads to ample uncertainty about the company's outlook. While I do believe that Valeo has assembled a very strong position and platform for electrification, that assembly has led to high upfront costs with the payoff coming further down the road. I do still believe that Valeo is undervalued, but this is a company that is deep in the doghouse and will need time to reemerge.

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Valeo Hits The Wall, And The Wall Falls On Top Of It

BorgWarner Bumping Along The Bottom In Search Of A Spark

Vehicle components supplier BorgWarner (BWA) continues to sputter along, having not really gone anywhere over the past three months after a nasty decline from the highs to start the year. BorgWarner’s peak-to-today drop has actually exceeded the overall parts sector (down 25% versus down about 15%), even though the company’s actual performance hasn’t been that bad and its positioning for the future transition to hybrids and electrics look good.

I think BorgWarner is cheap enough to warrant serious consideration, but this will probably take more patience to work out. I don’t see a big turnaround in the U.S. car market next year, and I don’t feel all that comfortable counting on a big turnaround in volume in China either. That leaves the shares in a sort of performance no man’s land. I do believe these shares will be at a higher level next year as investors start looking ahead to better auto volumes and gaining more confidence about the path forward for hybrid and electric programs.

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BorgWarner Bumping Along The Bottom In Search Of A Spark

Valeo Pounded Down On A Weak Transition Period

I had previously written that I thought Valeo (OTCPK:VLEEY) (VLOF.PA) shares could remain weak as the company stumbled through a weak transitional period, but I didn’t expect the shares to fall by a third on a year-to-date basis. Granted, the sector has been weak (BorgWarner (BWA) is down about 12% year-to-date, as is Schaeffler (OTC:SCFLF), and Continental (OTCPK:CTTAY) and Faurecia (OTCPK:FURCY) are down closer to 15%), but it seems like the shares have been hammered beyond what admittedly weaker-than-expected near-term results would other deserve.

Valeo management is calling for double-digit revenue growth next year, but the sell-side’s stance seems to be more along the lines of “yeah, sure you will…” and the market is not giving much credit for a backlog that should drive meaningful growth in few years’ time, particularly in new hybrid and EV programs. Although Valeo’s performance is doing nothing to build confidence today, if management can deliver better results in the fourth quarter (the third quarter is not looking promising), maybe these shares will finally recapture a little investor support.

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Valeo Pounded Down On A Weak Transition Period

EV's And Robots Offer Powerful New Growth Legs For Nidec

As the company goes from strength to strength, I continue to be impressed by the management team at Nidec (OTCPK:NJDCY) (6594.T). Not only does the company continue to gain share with its core brushless motor technology, but it also continues to expand into complementary businesses and find new opportunities to apply its core capabilities. There are still plenty of opportunities to gain share in existing businesses like appliance motors, but the more exciting opportunities are in areas like electric vehicles and robotics.

I wish Nidec was undiscovered and undervalued, but the shares do already reflect at least some of the exceptional growth potential. I suppose a mid-to-high single-digit annualized expected return isn’t terrible in today’s market, and the shares could still outperform if the company surpasses earnings expectations, but it’s tough to call this a cheap stock today.

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EV's And Robots Offer Powerful New Growth Legs For Nidec

BorgWarner Looks Well-Positioned And Undervalued

BorgWarner (BWA) has proved to be another interesting company and stock to watch in the auto/commercial vehicle components sector. Although BorgWarner is uncommonly well-positioned to benefit from both stricter standards for internal combustion engines (or “ICE”) and the conversion toward hybrid and electric vehicles (or EVs), this often seems to be a stock where the market is looking for an excuse to not like it.

I thought BorgWarner was a little pricey back in October of 2017, and I don’t feel like I’ve missed out on much – the shares are down a bit over that period, while other auto parts companies like Lear (LEA) and Magna (MGA) have produced double-digit returns.

With healthy content growth pushing revenue growth well ahead of underlying build rates and reasonably good wins for upcoming hybrid/EV business, I’m more interested in the valuation and the stock now. I do have some worries about more challenging comps later in the year, and BorgWarner doesn’t have as much leverage to future hybrid/EV adoption as some, but I think this is a stock worth considering today.

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BorgWarner Looks Well-Positioned And Undervalued

Valeo In A Lull, But Bringing In The Orders

I continue to be both frustrated and intrigued by Valeo (OTCPK:VLEEY) (VLOF.PA). When I last wrote about this large auto parts supplier, I wrote that there was a credible risk of near-term disappointment in revenue and margins and that has come to pass. The local shares are down about 6% from the time of that last article, lagging peers like Continental AG (OTCPK:CTTAY), Autoliv (ALV), BorgWarner (BWA), Schaeffler (OTC:SFFLY), and Faurecia (OTCPK:FURCY), though the performance since my first write-up in 2014 has been solid.

While the near-term weakness is certainly a drag, the company's strong order flow is quite encouraging, and particularly so in the hybrid/EV joint venture with Siemens (OTCPK:SIEGY). Valeo shares could struggle a bit for another couple of quarters, but I like the valuation here and the long-term opportunity to leverage future growth in hybrid and electric vehicles.

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Valeo In A Lull, But Bringing In The Orders

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

BorgWarner Delivering The Content Growth

BorgWarner (BWA) has had a good year. I last wrote about the stock around the time of its 2016 investor meeting and thought then that the stock was undervalued and that the Street was overly pessimistic about the company’s positioning for the eventual transition away from internal combustion engines. It also didn’t help matters that the company hadn’t been doing a great job with its quarterly financial results vis a vis management guidance and analyst estimates. Since then, organic growth has improved significantly and the company has made a pretty compelling case for how and why it will continue to be a leader throughout the process of electrifying passenger vehicles. The shares have certainly responded – rising nearly 50% since that last article.

It’s harder for me to bullish now given the valuation. I don’t think the company is likely to get the FCF margin leverage it needs to validate today’s price on a DCF basis, though I freely acknowledge that content/share growth and margin leverage are more important drivers to the shares of auto components companies in the short run. This is back on a watchlist for me now, though, as I would like a better balance of opportunity and risk before committing funds to a position.

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BorgWarner Delivering The Content Growth

Valeo Still Hard On The Throttle

Many, if not all, auto component suppliers talk about content growth as a driver, but France's Valeo (OTCPK:VLEEY) (VLOF.PA) has been delivering in a big way. Revenue growth has continued to outpace underlying industry production growth by a very healthy pace, with no real weak spots in the business. Investors have certainly taken notice, with Valeo shares up another 30% or so from the time of my last writing, and easily outpacing rival suppliers like Continental (OTCPK:CTTAY), BorgWarner (NYSE:BWA), and Denso (OTCPK:DNZOY) over that time.

Just how long these good times can continue is a key debate between the bulls and bears. Auto production volumes are slowing, and I'm skeptical that Valeo can escape that underlying reality. What's more, there are valid questions as to just how much content can be added to cars before consumers rebel and whether OEMs will start pushing suppliers for more concessions. On the other hand, electrification looks increasingly inevitable, and Valeo has been doing well with order wins for 48V systems. I continue to believe that high single-digit revenue growth and double-digit FCF growth remain plausible for Valeo and that the shares still have some upside, but I think the growth story here is a little long in the tooth.

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Valeo Still Hard On The Throttle

Modine Looking To Break From Its Past

Modine Manufacturing (NYSE:MOD) has some work to do. Not only have the shares been lackluster performers compared to broadly-defined peers like BorgWarner (NYSE:BWA), Dana (NYSE:DAN), Valeo (OTCPK:VLEEY), and Lennox (NYSE:LII) for some time now, the weak history with respect to margins, revenue growth, returns on capital, and cash flow suggests that that underperformance is not unreasonable.

Management hasn't been sitting still, though, and there is perhaps a more bullish outlook now. Multiple restructuring efforts have seen several plants closed over the past decade and tens of millions of dollars taken out of the cost structure more recently. What's more, management significantly accelerated its mix shift away from vehicles with what looks like a logical and reasonably priced deal. If these improvements can move the company close to a 10% EBITDA margin, there may be an argument that the shares are undervalued, though the lackluster free cash flow generation is a risk factor that I wouldn't ignore.

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Modine Looking To Break From Its Past

Ongoing Outperformance At Valeo Continues To Build Value

Valeo (OTCPK:VLEEY) (VLOF.PA) doesn't have the most liquid ADRs and it is not a household name for most American investors, but this French auto components component continues to demonstrate why it's worth following. The shares are up more than 65% from my first article on the company for Seeking Alpha, and up another 15% or so since my April update, as the company continues to post double-digit content growth and exceptional order growth that paves the way for strong revenue and earnings growth over the next three to five years.

Valeo shares still appear to be priced for double-digit annual total returns. A slowdown in car sales in Europe and/or North America looms as a risk, but Valeo is well-placed with what seem to be inevitable trends towards greater adoption of LED lighting, advanced sensors/cameras, telematics, and automobile electrification and emissions control.

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Ongoing Outperformance At Valeo Continues To Build Value