We came across a bullish thesis on Aptiv PLC (NYSE:APTV) on ValueInvestorsClub by ElCid. In this article, we will summarize the bulls’ thesis on APTV. The company’s shares were trading at $62.73 when this thesis was published, vs. the closing price of $66.83 on Mar 07.

An aerial view of a large auto finance facility, the cars inside the facility reflecting the company's growth.

APTV designs, manufactures, and sells vehicle components in North America and internationally. The company provides electrical, electronic, and safety technology solutions to the automotive and commercial vehicle markets.

China accounts for 55% of APTV’s business and the preference for Chinese OEMs has put pressure on the firm. The North American market is also witnessing a slump with 4 of the top 5 OEM customers reducing production. Customers are also preferring Japanese OEMs due to their lower cost. Even the EV market has plateaued and there could be a drop in demand after the subsidy is removed. All these headwinds have been factored in the stock price and APTV is expected to see better days.

On a positive note, the price gap between EVs and ICE is narrowing due to lower battery costs. Many low-cost EVs are also scheduled to be launched in the next two years. With favorable regulations in place, EV penetration should clock 69-72% by 2032. APTV is also looking to benefit from autonomous driving features with L2 and L3 systems commanding better pricing ($1000 and $3000 vs $300 for L1). Currently, only LSD-MSD% vehicles have L2 features but the reach can rapidly improve to 33% in 2030. Legislations in Europe and other countries require Advanced Driver Assistance Systems (ADAS) capabilities that are present in L2 and above.

The Electrical Distribution Systems (EDS) division should also generate significant value if it spins off. This revenue growth is estimated at MSD% with EBITDA growing at LDD%. Due to its strong cash flow capabilities, capital returns can be magnified by deploying leverage.

A SOTP valuation can be conducted using a spin-off of the EDM division, creating new APTV and EDM. The new APTV should trade close to its peer TE Connectivity with an EBITDA multiple of 12.7x. The EDS division offers a lower growth story and lower margin and therefore, a 5x multiple is justified. Combining the two businesses, the intrinsic share value is $99.52. This is approximately 50% more than the market price today.

While we acknowledge the potential of APTV as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than APTV but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.