The Market Is Betting Big on APTV - What's the Catch?

Auto Parts company Aptiv PLC is standing out today, surging to $109.58 and marking a 3.1% change. In comparison the S&P 500 moved only -0.0%. APTV is -13.96% below its average analyst target price of $127.36, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, shares of Aptiv PLC have offered a similar return to the S&P 500, moving 11.0%.

Aptiv PLC engages in design, manufacture, and sale of vehicle components worldwide. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.

Aptiv PLC's trailing 12 month P/E ratio is 48.9, based on its trailing EPS of $2.24. The company has a forward P/E ratio of 18.0 according to its forward EPS of $6.08 -- which is an estimate of what its earnings will look like in the next quarter.

As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.33, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Aptiv PLC's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.78. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing APTV's growth potential .

To better understand the strength of Aptiv PLC's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.

APTV's gross profit margins have averaged 16.0% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins are declining based on their four year average gross profit growth rate of -4.9%.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Aptiv PLC's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2023-02-08 1,263,000 -840,000 2,103,000 15.3
2022-02-07 1,222,000 -602,000 1,824,000 -8.2
2021-02-08 1,413,000 -574,000 1,987,000 -16.9
2020-02-03 1,624,000 -767,000 2,391,000 n/a
  • Average free cash flow: $2.08 Billion
  • Average free cash flown growth rate: -3.2 %
  • Coefficient of variability (the lower the better): 11.5 %

Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, APTV is in a position to do either -- which can encourage more investors to place their capital in the company.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Aptiv PLC's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 3, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.

With an inflated P/E ratio, an average P/B ratio, and a steady stream of strong cash flows with a flat trend, we can conclude that Aptiv PLC is probably overvalued at current prices. The stock presents mixed growth prospects because of its strong margins with a negative growth trend, and an inflated PEG ratio.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.