As Transportation Changes, Not All Auto Parts Companies Will Win

The next 'Digital Frontier' is unfolding...

Companies like Waymo – a division of Alphabet's (GOOGL) Google – Tesla (TSLA), and Uber (UBER) are working to make the next science-fiction idea into reality. Self-driving cars – or autonomous vehicles ("AVs") – are steadily evolving into a real product.

These companies are currently conducting real-world testing, with an engineer in the driver's seat ready to take over at the drop of a hat in case something goes wrong.

Despite the big push, we're seeing significantly less progress being made than many experts have hoped for. Regulatory hurdles were raised after an AV killed a pedestrian in 2018. And there are plenty of technological hurdles as well...

In cities, the huge amount of sensory input, overlapping road rules, and changing conditions have proven difficult for engineers. Cities as they currently exist may be too unfriendly for AVs just yet. The technology needs more time and perhaps a more structured environment.

But as Bloomberg recently explained, Japan-based Toyota Motor (TM) is changing the city itself to usher in the next wave of transportation.

The automaker is building a "Woven City" near the base of Mt. Fuji at the site of one of its old factories. The city will be custom-built with interconnected sensors and smart devices to allow for AVs to drive unhindered.

Within the Woven City, AVs will be used for transport, deliveries, and mobile shops, all in the hope that this will help complete the missing link in AV development. It might seem like a big step for a car company to get into city planning at every level, but these are the steps car manufacturers will need to consider as they work to have the future drive itself.

AVs – and electric vehicles ('EVs') – will change the entire transportation market...

As the future of transportation accelerates, it won't just be the automakers like Tesla and Toyota that benefit from the huge spending promised by the switch. Many automotive parts manufacturers will also see a huge tailwind from the big wave of spending.

Of course, not all auto parts companies will benefit the same way...

The ones that make parts specifically for internal combustion engines will be forced to adapt. Meanwhile, companies like Aptiv (APTV) will see a surge in demand.

Aptiv makes safety, sensor, and electronic wiring technology for cars – an essential part of the supply train for EVs and AVs.

So, to see if Aptiv is set up to succeed in the future, we have to see how the company is performing now...

That means we need to break down the fundamentals... And our Altimeter tool has the answers.

Using the power of Uniform Accounting – which removes the distortions in as-reported financial metrics – The Altimeter grades stocks based on their real financials.

After we clean up the GAAP numbers, we can see that Aptiv struggled in 2020. Its Uniform return on assets ("ROA") fell from 17% in 2019 to 7% last year due to pandemic-related headwinds.

However, Aptiv's 17% Uniform ROA prior to the pandemic was well above corporate average profitability of 12%. This shows that the company was historically a much stronger performer.

And looking ahead, analysts are expecting the company's profitability to begin inflecting back in the right direction to 11% in 2021. This recovery means Aptiv gets an "A" for Earning Power Trend... And as returns will trend toward corporate averages, the company gets a "C" grade for Earning Power.

Putting it all together, Aptiv earns an overall "B" for Performance in The Altimeter.

We now have better context for Aptiv's profitability... But the rebound doesn’t necessarily mean the stock is a buy.

For this, we need to turn to valuations. We can then see if the market is already pricing in this turnaround in profitability, or if investors aren't yet clued in.

Altimeter subscribers can click here to see how Aptiv is valued based on Uniform Accounting... and if the market is pricing in a move higher in profitability as the company recovers and the AV revolution unfolds.

If you aren't an Altimeter subscriber, click here to find out how to gain immediate access to the rest of the Uniform data for Aptiv... other big names in the AV and EV space like Tesla... and the full grading for more than 4,000 other publicly traded companies.

Regards,

Rob Spivey
May 20, 2021