By Al Root

Breakups are becoming all the rage on Wall Street -- because they have worked.

On Wednesday, auto supplier Aptiv announced plans to split into two companies. One will supply electrical systems. Aptiv is a big supplier of electrical components to auto makers. It sells more equipment on electric vehicles and hybrids than on traditional cars.

More EVs -- be they all-electric or hybrids -- are being sold. Globally, about 23 million electrified cars were sold in 2024, up some 4 million from 2023.

Aptiv's other business is more of a technology company, selling "sensor-to-cloud tech solutions." It also supplies automotive software and hardware for systems such as autonomous driving. The company's plan is to expand that business beyond the automotive market -- sensing technology and software can go into many things.

The electrical business generated about $800 million in earnings before interest, taxes, depreciation, and amortization, or Ebitda, in 2024. The tech business generated about $2.3 billion in Ebitda.

Each breakup, of course, is different. Some of the recent ones have yielded big gains. Between 2023 and 2024, General Electric split into GE HealthCare Technologies, GE Vernova, and GE Aerospace. Tracking the stocks is tricky, but the total gain in market value from the splits measures in the hundreds of billions of dollars.

3M stock has performed well since it spun off its healthcare division, called Solventum, in April 2024. DuPont will spin off its electronics business this year. Honeywell International might spin off its aerospace division and break up, and there is even an activist who wants to see Boeing split into three companies to facilitate its turnaround -- one dedicated to commercial aerospace, one to defense, and another to services.

GE's breakup worked well because all three companies are growing earnings. Business execution is always important. But simply breaking apart can help valuation multiples. Honeywell stock trades for 21 times estimated 2025 earnings. (The S&P 500 index trades for closer to 22 times.)

Comparable companies in aerospace and automation trade for closer to 30 times and 25 times, respectively. Honeywell seems to have a conglomerate discount right now.

In Aptiv's case, shares currently trade for about 9.3 times estimated 2025 earnings. Auto suppliers don't get big valuation multiples, as the car business is cyclical and low-growth. General Motors stock trades for about five times earnings.

Ideally, Aptiv's tech business would fetch something closer to an industrial company multiple -- more like 20 times -- while the electrical distribution business could continue to trade like an auto supplier. Based on the distribution of Ebitda, the potential revaluation stock bump is as high as 90%. That's the ideal scenario, needless to say.

Investors aren't assuming the ideal. Breakups take time, and investors want to see growth and business execution before paying up. Aptiv stock was up 2.7% in recent trading, at $63.43, while the S&P 500 and Dow Jones Industrial Average were up 0.8% and 0.2%, respectively.

As of midday, Aptiv shares were down about 21% over the past 12 months. It's been a tough time for many auto suppliers amid slowing demand growth for EVs and slowing production growth for the overall car business globally.

Write to Al Root at allen.root@dowjones.com

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January 22, 2025 11:51 ET (16:51 GMT)

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