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Elevator Pitch
I assign a Hold investment rating to Aptiv PLC’s (NYSE:APTV) stock, which describes itself as a provider of “electrical, electronic and active safety technology solutions” for the automotive market in its 10-K filing. The weaker-than-expected top line performance for the Chinese and European markets, and higher-than-expected costs were the key reasons for APTV’s Q2 2022 earnings miss. It is tough to predict how Aptiv will perform in 2H 2022, considering a mix of positive and negative factors. The uncertainty leads me to a Neutral view and Hold rating for Aptiv.
Recent Financial Performance Disappointed The Market
APTV’s most recent financial results for the second quarter of 2022 was a disappointment for investors.
Aptiv’s Q2 2022 revenue of $4,057 million came in -1% below the market’s consensus top line estimate of $4.08 billion, and its second-quarter non-GAAP earnings per share of $0.22 turned out to be -64% lower as compared to the Wall Street analysts’ consensus normalized EPS projection of $0.61.
The company’s headline revenue rose by +7% YoY in Q2 2022, but this was equivalent to a -3% QoQ contraction. Also, while APTV’s adjusted revenue (excluding changes in top line due to commodity price and foreign exchange fluctuations) increased by +9% YoY in the recent quarter, some of its market didn’t do well. Specifically, a +21% YoY growth in adjusted revenue for the North American market was partially offset by a more modest +4% YoY increase in adjusted revenue for the European market and a -2% YoY decline in adjusted revenue for the Chinese market in Q2 2022.
The Q2 2022 non-GAAP EPS of $0.22 for Aptiv also represented a -69% fall in comparison with the company’s Q2 2021 adjusted EPS of $0.71, as APTV suffered from weaker profitability. According to its recent quarterly earnings presentation, Aptiv’s adjusted EBITDA margin and operating margin decreased by -4.1 percentage points and -3.6 percentage points to 9.0% and 5.3%, respectively in the second quarter of this year.
At the company’s Q2 2022 investor briefing, APTV highlighted that its top line growth was affected by “shutdowns in China and some softening in vehicle production schedules in Europe.” With regards to profitability, Aptiv was negatively impacted by higher costs relating to inflation and supply chain issues, just like other automotive suppliers.
Customer Cost Recoveries Are Expected To Boost APTV’s 2H 2022 Profitability
Aptiv’s Q2 2022 profit margins could have been higher, if not for lower-than-expected customer cost recoveries in the recent quarter.
In its second-quarter results presentation, APTV noted that the “timing of material inflation recoveries” was a key factor contributing to the company’s below-expectations profitability for Q2 2022. Aptiv also mentioned at the company’s Q2 2022 earnings call that “cost recoveries we have already negotiated with customers and are coming in above plan”, and emphasized that it “will have a more significant impact on second half profitability.”
The positive expectations regarding the effects of customer cost recoveries are validated by both APTV’s management guidance and the sell-side’s consensus financial projections.
The company expects its normalized EBITDA margin and operating profit margin to be in the 12.7%-13.4% and 9.0%-9.7% ranges, respectively. In comparison, Aptiv’s 1H 2022 adjusted EBITDA and operating margins were substantially lower at 10.2% and 6.5%, respectively. This implies that the management sees the company’s profitability improving substantially in the second half of the year.
Separately, the sell-side analysts are forecasting that Aptiv’s adjusted operating profit margin will expand from 5.3% in the second quarter of 2022 to 11.0% and 12.4% for the third quarter and fourth quarter of the current year, respectively as per S&P Capital IQ. The Wall Street’s consensus numbers also suggest that APTV’s normalized EBITDA margin is expected to rise from 9.0% in Q2 2022 to 14.8% for Q3 2022 and 16.0% for Q4 2022.
European Market Weakness And Motional’s Losses Are Key Headwinds
As discussed in the prior section, customer cost recoveries should boost Aptiv’s operating profitability for 2H 2022. However, the dim growth prospects for Europe and continued losses for the Motional autonomous driving joint venture will be a drag on APTV’s top line and bottom line, respectively in the near term.
In an earlier section of the article, I highlighted that Europe was one of the key markets (alongside China) that didn’t perform well for Aptiv in Q2 2022 in terms of adjusted revenue growth. APTV also noted in its second-quarter earnings presentation that it reduced its full-year FY 2022 revenue guidance by -4% from $17,950 million previously to $17,150 million now, on the basis of a “weaker Europe outlook” which is indicative of “lower customer schedules.”
Notably, a recent August 15, 2022 Bloomberg article mentioned that “the risk of a euro-area recession has reached the highest level since November 2020” based on a survey of economists. If a recession does materialize in the European region, it will naturally be negative for automotive demand in this specific market. There might be early warning signs for the automotive market in Europe, with Aptiv revealing at its Q2 2022 results call that it observed “a reduction in European customer schedules heading into” 2H 2022.
Moving on to losses from joint ventures, the Motional autonomous driving business, which APTV has a 50% stake in, contributed a net loss per share of -$0.26 to Aptiv’s Q2 2022 bottom line. In other words, Aptiv’s normalized ESP for the recent quarter might have been much higher at approximately +$0.48 if losses from Motional were excluded.
In an earlier media release dated August 11, 2020, Motional refers to itself as a company “developing and commercializing SAE (The Society of Automotive Engineers) Level 4 vehicles” or “autonomous vehicles that perform all driving tasks.” There is obviously a lot of strategic value associated with APTV’s autonomous driving joint venture, but Motional could take a long period of time to be profitable. Aptiv acknowledged at its recent quarterly earnings call that Motional “will continue at current sort of (investment) run rates” and highlighted that it will assess the “monetization” of Motional “over the medium and longer term.”
Closing Thoughts
I rate Aptiv’s shares as a Hold. APTV’s Q2 2022 financial performance was poor relative to investors’ expectations and historical comparisons (i.e. YoY EPS fall). Looking forward, the outlook for Aptiv is uncertain. Customer cost recoveries will be positive for Aptiv’s operating profit margins in 2H 2022, but APTV’s second-half top line and bottom line might still disappoint due to European market weakness and sustained losses for Motional, respectively.
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