Aptiv PLC

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Aptiv is a global technology and mobility company, primarily focused on designing, engineering, and manufacturing vehicle components and systems, particularly in the areas of advanced safety and autonomous driving.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Aptiv’s core business revolves around providing technologies to automotive OEMs, or original equipment manufacturers, particularly those creating the modern software-defined vehicle with electric architecture. They also address related software, hardware, and integrated system design.

Aptiv’s moat, which we would rate as a 2 out of 5, is currently relatively narrow with some promising characteristics, but also challenges. It currently does not command a dominant, defensible position in the market, it has structural tailwinds but their profitability remains under intense pressures. Let us elaborate.

Moat Analysis

Aptiv’s moat, while not exceptionally wide, is primarily derived from:

  • Customer Relationships and Integration: A key aspect of Aptiv’s business is the high level of integration with its clients. Because Aptiv creates custom electrical architecture, wiring, and connections for each OEM, the company is intimately connected with its customer’s design. While this may create switching costs, it also presents a unique vulnerability if an OEM chooses to bring these components in-house, potentially eroding Aptiv’s sales.
  • Proprietary Technology and Systems Expertise: Aptive does have significant expertise in their advanced safety and autonomous systems. The company offers a wide range of components and systems designed for the future of the auto industry. These advanced capabilities in safety and autonomous driving are not easily copied by other manufacturers, and their knowledge and expertise will be needed in the transition to electric vehicles. They have a proprietary operating system for their centralized computing platform that gives them some advantage against their competitors.
  • Supply-Chain Relationships: Aptiv builds strategic long-term relationships with its suppliers. They are also working to mitigate supply chain constraints and disruptions.

While these aspects contribute to some competitive edge, the rapid pace of technological change and competitive environment of the industry prevent the company from reaching a wider, defensible position. Their moat rating of 2 means their competitive advantages are still vulnerable to competition.

Risks to the Moat and Business Resilience

Several legitimate risks could damage Aptiv’s moat and business prospects:

  • Technological Obsolescence and Disruption: The pace of innovation in automotive technology is breakneck, and any changes in tech could render current solutions obsolete. For instance, companies might discover new ways to build or power cars which may not utilize Aptive’s components and systems leading to massive losses in revenues.
  • OEM In-Sourcing: Automakers are trying to create more and more internal components. Many are seeking to bring certain manufacturing processes in-house, which will take away business from Aptiv.
  • Competition: Aptiv is up against formidable competition. A lot of companies and conglomerates are also investing in new technologies in this sector. Furthermore, competition is always increasing in pricing, quality, efficiency, and new innovative products.
  • Supply Chain Disruptions: They rely heavily on third-party suppliers, and if these suppliers get into trouble, Aptive’s margins and sales will also be affected. Although they are trying to mitigate these challenges by multi sourcing suppliers and diversifying production, these solutions could take time to take effect.
  • Economic Uncertainty and Recessions: They are a cyclical business. Any economic slowdown could cause their OEMs to slow production which can have a negative impact on APTV’s sales. For example, in 2020 the pandemic hurt revenues considerably and in 2022, chip shortage and the Ukraine war impacted their sales. These are real risks that the company faces on the day-to-day, which also shows limited defensive capability and weak resilience.

While Aptiv’s financial performance has shown significant progress over the past few years, the company continues to face potential disruptions in the market. The company has consistently beaten guidance over the past few quarters which has encouraged the management to raise the revenue guidance for the year.

Business Explanation

Aptiv is a large automotive parts and systems manufacturer, providing the technological components for advanced vehicles, focusing on:

  • Signal and Power Solutions: This segment includes vehicle electrification and signal distribution. They also have expertise in high-voltage distribution. It primarily includes electrical architecture, wiring, and connectors.
  • Advanced Safety and User Experience: This includes advanced driver assistance systems (ADAS) and autonomous driving components and software which offer safety and convenience. These products often include systems for self driving and smart cabins.

The company has a global presence, with revenues spread across different regions. They have a diverse customer base that includes most of the largest auto manufacturers globally.

The company’s revenue distribution is pretty wide spread geographically. In 2021, they generated their sales from the following regions:

  • North America 49%
  • Europe 32%
  • Asia Pacific 19%

Aptiv is positioning itself in the high-growth area of electrification and advanced driver-assistance technologies. They are not just focusing on individual components, they are developing entire platforms to deliver the connected electric vehicles.

A notable aspect of Aptiv’s operations is its focus on advanced technologies aimed at the future of mobility, including autonomous driving systems, in which they partner with other technology providers. This gives them an edge in future growth.

They compete with other part suppliers, such as Continental, Bosch, and Denso. However, because each OEM creates custom cars and each model is different from another, the car part industry has a high level of customization and every supplier needs their own production and design.

In recent years, there has been a sharp focus on the electric vehicles market. As more and more cars become electric, auto-manufacturers are looking for advanced battery management systems and other components. Because of their expertise, Aptiv has become a go-to supplier for these manufacturers, especially when it comes to next-generation software-defined vehicles.

Aptiv has announced an increase in their long-term target market by 50 billion dollars to a total of 150 billion dollars. They also expect the ADAS portion of their revenues to be 20 percent of total revenues by 2026.

Financial Analysis

Aptiv’s financial performance has been steadily improving after a tough period during covid. For the three months ended September 30, 2022:

  • Net Sales: $4.2 billion, up from $3.9 billion year-over-year
  • Net income attributable to Aptiv: $235 million in profit in 2022, as compared to a loss of $17 million in 2021
    • Free cash flow: $465 million, up from $13 million YoY.

Let’s analyze the balance sheet, with the following from September 30, 2022:

  • Total Assets: $17.3 Billion, up from 16.6 billion YoY.
  • Total Liabilities: $10.2 billion, up from $9.5 billion YoY.
  • Total Equity: $7.3 Billion, up from $7.0 billion YoY.

Aptiv’s balance sheet shows decent liquidity, their debt is manageable, and they are on the track to generating free cash flows in the future.

Aptiv’s debt is mostly fixed-rate and long-term, so there isn’t much pressure on debt servicing even if the interest rates keep going up. However, Aptive’s debt could cause problems if the company runs into some trouble or if their performance lags.

A look into cash flows shows great improvements, and with the company making more profits than before, the cash flows should continue to improve.

The company also has $2.2 billion in convertible preferred equity, and because of their convertibility feature, their debt risk should be lower, and provide more flexibility and option to grow.

Understandability

We would rate the understandability of Aptiv’s business as a 3 out of 5. Here’s why:

  • Aptiv is a somewhat complicated business, focusing on a niche that requires some expertise in technology to understand.
  • Their financial reports can be complicated, requiring a better understanding of accounting principles.
  • However, the basic principles are simple enough, and their main product is to deliver components for electric or autonomous cars.

Balance Sheet Health

The balance sheet health is rated at a 4 out of 5:

  • Aptiv has decent levels of current assets, relative to its liabilities. It means they have enough liquid assets to cover their short-term financial obligations.
  • The company has a considerable amount of debt, but their increasing profits are sufficient enough to service their current debt obligations and should be manageable going forward.
  • They also are trying to reduce their debt to equity ratio and improve their leverage.
  • The company is very big, so their size also protects them from risks.

Recent Concerns and Controversies

  • The company has been facing significant supply-chain challenges, notably due to the Ukraine-Russia conflict and semiconductor shortages. However, they have been able to navigate those issues and are gradually improving the supply chain. These are expected to be resolved by mid-2023, according to the company.
  • There has been an increase in operating costs due to general inflation. However, they are managing those costs well and also passing the costs on to their customers.
  • They have announced a few product recalls in recent times, but there has been no major material impact.

Overall, despite facing some challenges, Aptiv’s long-term prospects are bright due to their expertise in electrification and autonomous driving technologies, both of which are set to be a major part of future cars.