The global electric and autonomous vehicle industry appears to be tale of stories presently. While the industry’s fundamentals go from strength to strength, collectively the industry has underperformed other sectors in regards to valuations and returns.

Global electric vehicle (EV) sales are now approaching the 4 million mark. This includes battery electric passenger vehicles and plug-in hybrid passenger vehicles.

Global Electric Vehicle sales H12018

Advanced Driver Assistance Systems (ADAS) adoption is also robust. The global ADAS market is expected to reach USD 67.43 billion by 2025, and is growing at a CAGR 19.0%, according to a new report by Grand View Research. Increasing government initiatives for mandating driver assistance systems in order to lower road accidents is expected to underpin market growth.

ADAS Market Total Shipments 2015 - 2025

However, in spite of the positives on electric vehicle sales and ADAS adoption, shares of European and U.S. auto parts suppliers and O.E.M.s continued to lose ground relative to the broader market over the past months.

The factors most weighing on shares are:

  • uncertainty relative to the global trade environment; and
  • concerns relative to the trajectory of global light vehicle sales and production. The recently negotiated United States Mexico Trade Agreement, despite currently lacking all relevant details specific to the auto industry, should reduce some uncertainty.

Electric vehicle company analysis

Valeo (EURONEXT PARIS: FR)

Valeo has disappointed investors with very limited growth over the past four quarters. However, operationally Valeo is making progress. Strong cost savings in H12018 have allowed the company to offset incremental raw material, fixed costs and currency headwinds. Once growth returns to Valeo, the stock should re-rate aggressively. The key question is when. The stock trades now at FY19 X 0.6 EV/Sales with a 2019 PE ratio of only 7X. Analysts forecast the growth profile may accelerate by Q4FY18.

Valeo is present in some the fastest-growing segments in the auto industry and the company has a leading (#1 or #2) market position in literally all of its product-segments. Valeo’s product portfolio is geared to areas experiencing strong demand (eg LED lighting, 48-volt systems, laser scanners and other ADAS-tech) and the headwinds that it is facing should (largely) be contained to 2H18, allowing it to reap the benefit of increasing volumes over the medium term. We expect 1H18 will mark the trough for earnings.

Autoliv (NYSE: ALV)

Autoliv had been a strong performer for the first 6 months of 2018, up some 20% into July. A (slightly) disappointing 2Q earnings report and the concerns re auto suppliers mentioned above have pressured the shares in 2H 2018. That said, while management lowered full year 2018 organic growth guidance in its 2Q earnings release to +8% Y/Y from >+10% prior they reaffirmed confidence in the 2020 outlook.

It’s likely that that pressures impacting 2018 are temporary in nature, although we may see some Worldwide Harmonised Light Vehicle Test Procedure or WLTP (a laboratory test is used to measure fuel consumption and CO2 emissions from passenger cars, as well as their pollutant emissions) related headwinds in the third quarter of 2018.

Autoliv is highly levered to the growth in safety content per vehicle in developed and developing markets. As a result of the higher sales provided from large amount of airbag business won from Takata, analysts expect Autoliv’s operating margin to rise materially into 2019.

Flex (NASDAQ: FLEX)

As to FLEX, we note that investor appetite for EMS/supply-chain stocks has weakened very significantly YTD in part owing to supply constraints (eg MLCCs or Micro Lead-frame Chip Carriers, memory and resistors), investments associated with on-ramping new customers, and in particular the risk that supply-chains get disrupted by the burgeoning trade war with China.

Specific to Flex, investors are also growing concerned that the new Nike partnership is misconceived, will weigh on segment operating margins over the near term and therefore on EPS. However, while the production ramp-up of Nike’s shoemaking business hurts near-term profitability, Flex is aggressively targeting the automotive and medical segments to boost sales in the high-reliability division. The increasing use of electronic components in cars, along with higher penetration of network connectivity of medical devices, should bolster the assembler’s sales.

Growth in the energy and capital-equipment segments also helps boost sales in the industrial division. Flex is currently trading at only 8X FY2019 PF EPS, which is a discount to its 5-year average forward multiple of 10X plus. Solid execution in 2HFY19, including a margin recovery, could see a positive re-rating of the stock.

TE Connectivity (NYSE: TEL)

TE Connectivity Ltd announced last month that it has entered into a definitive agreement to sell its subsea communications business (SubCom) to Cerberus Capital Management, L.P., a global leader in alternative investing, for US$325 million in cash. The transaction is expected to close by the end of the first quarter of TE’s fiscal year 2019 and is subject to customary closing conditions. The company expects to use proceeds from the sale to fund share repurchases. TE’s SubCom business, a part of the company’s Communications Solutions segment, is a leading global supplier of undersea communications technology and marine services.

“The SubCom business is a leader in the undersea telecommunications market, and distinctly different from the rest of TE’s connectivity and sensor portfolio. We are pleased that with this transaction we increase our focus as a leading industrial technology company. It strengthens our business model; resulting in a stronger growth profile, reduced cyclicality, higher margins and a greater return on investment,” said TE Connectivity CEO Terrence Curtin.

Infineon (XETRA: IFX)

Infineon held an investors conference call on 2 October 2018 hosted by Peter Schiefer (Division President, Automotive) on Infineon’s automotive business.

Key messages were as follows:

  • Infineon sees positive development of orders in CY3Q, with orders in September sequentially higher than orders in August, which, in turn, were higher than orders in July;
  • Infineon saw book-to-bill of >1x in automotive business in August/September;
  • Infineon sees recent profit warnings in the automotive space as company-specific with limited read-across to the broader market;
  • Infineon sees limited impact from WLTP and tariffs and expects healthy auto production growth even in 2019; and
  • Auto semiconductor content growth remains robust, with contribution coming from all segments of the market: EV, ADAS, and also in carbon reduction in ICE engines.

This communication, in our view, should provide reassurance to investors who were concerned about the near-term operational performance of the company and particularly end markets.

Tesla (NASDAQ: TSLA)

“A positive step for Tesla’s China ambitions – The Chinese Gigafactory” (Reuters, 17 October 2018)

“Tesla Inc has signed an agreement with the Shanghai government for an 860,000 square meter plot of land to build its first overseas Gigafactory, the electric carmaker said in a Chinese social media post on Wednesday. The land agreement marks a key step toward the firm and its Chief Executive Elon Musk making cars locally in China for the fast-growing market, even as tariffs imposed by Beijing on U.S.-made goods have caused it to hike prices of its imported models. Tesla signed a long-anticipated deal with Shanghai authorities in July to build its first factory outside the United States, which would double the size of its global manufacturing and help lower the price tag of Tesla cars sold in the world’s largest auto market.

“Securing this site in Shanghai, Tesla’s first Gigafactory outside of the United States, is an important milestone for what will be our next advanced, sustainably developed manufacturing site, Robin Ren, Tesla’s Vice President of Worldwide Sales, said in a statement. Tesla did not give the price tag for the plot, but the Shanghai Bureau of Planning and Land Resources said on Wednesday that a plot of land of 864,885 square meters had been sold at auction at a price of 973 million yuan ($140.51 million).

“Tesla signed a deal with Shanghai authorities in July to open a plant in the Chinese city with an annual capacity of 500,000 cars. The factory will help tap China’s rapidly growing market for so-called new-energy vehicles (NEVs), a category comprising electric battery cars and plug-in electric hybrid vehicles, even as China’s wider car market cools. NEV sales were up 54.8 percent in September and climbed 81.1 percent in the first nine months of this year to 721,000 vehicles, the country’s top automobile industry association said last week. Tesla, which started hiring for the new Shanghai factory in August, previously said that it would raise capital from Asian debt markets to fund the construction, which will cost around $2 billion.”

You can invest in these companies directly through Macrovue’s Car of the Future Vue.

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Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual and does not constitute financial advice. Consider the appropriateness of the information in regards to your circumstances. Past performance is not a reliable indicator of future performance.

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