June 19, 2018 - 5:55pm EST by
2018 2019
Price: 50.19 EPS 4.65 0
Shares Out. (in M): 89 P/E 16 0
Market Cap (in $M): 4,467 P/FCF 0 0
Net Debt (in $M): 1,500 EBIT 0 0
TEV ($): 5,844 TEV/EBIT 12 0

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I recommend entering a long position for Delphi Technologies, ticker DLPH, current price (i.e. today June 19 Tuesday's closing price) $50.19/share.

Delphi Technologies came into existence from a spin-off on December 2017. The old company is called Delphi Automotive, its ticker is also DLPH so we will call it old DLPH. Old DLPH spun off its powertrain business last December into Delphi Technologies and renamed itself Aptiv PLC, ticker APTV. Dec 4, 2017 is the record date; shareholders of old DLPH received 1 share of the SpinCo Delphi Technologies for every 3 shares of old DLPH. The new DLPH has 88,613,262 shares outstanding so the market cap is $4430M. APTV's market cap is currently $26.6B, so DLPH is the smaller SpinCo. It's interesting that the old DLPH itself was created by a spinoff from General Motors in 1999. The new DLPH will replace Frontier Communications (ticker FTR) in the S&P MidCap 400 index, while APTV will take old DLPH's spot and remain in the SP500.

DLPH initially traded around $52 post spinoff, moved up to $59 in Jan 2018, then traded down to about $50 now. I think there was a lot of selling pressure when DLPH is moving out of SP500 because many funds don't invest outside of SP500 (also there was ETF selling). This selling pressure should be over now.

In any spinoff situation, the most important things to figure out are: does it make business sense? what's the incentive of the management? is the valuation good? We will try answering these questions in the following discussion.

The old management team is staying with APTV (old DLPH's CEO Kevin Clark is now heading APTV), on the surface this flunked one of the criterion (management going to the SpinCo) for a good spinoff investment. However I think this is ok since the new DLPH is headed by Liam Butterworth, he was an SVP of the old DLPH and was heading old DLPH's powertrain division before the spinoff; it's natural for him to take over the rein at new DLPH while Kevin Clark keeps running the much larger APTV. I think both APTV and DLPH are good investment opportunities now. Liam Butterworth currently owns 90318 DLPH shares worth $4.52M, including 57330 not yet vested shares worth $2.87M. His 2016 total compensation is about $3.3M. Earlier this year some directors bought $1.6M worth of shares at price about $49/share. It's worth noting that there was no DLPH insider selling since the spinoff. (There was some insider selling for APTV recently for about $3.3M)

Electric vehicle and automated driving are very hot now. Everyone wants to grab something that can benefit from the perceived impending EV, auto-driving adoption while throwing away things that they think will be made obsolete together with ICE. Clearly this is part of what the management was thinking when they decided to do the spinoff. The spinoff is structured so that the RemainCo APTV will be focusing on designing and producing electronic systems, advanced safety technology and integrating the hardware and software for self-driving cars; while the SpinCo DLPH will be focusing on powertrain stuff. Clearly... APTV is the future while DLPH is the past and the management chose to stay with APTV while piling $1.5B debt onto DLPH. This presents us a great investment opportunity because the market is overlooking the importance of DLPH's powertrain technology, which is not only not going away, but will benefit materially from tighter environmental regulations and automobile electrification.

What does DLPH do?
DLPH is a leader in the development, design and manufacture of vehicle propulsion systems that optimize engine performance, increase vehicle efficiency, reduce emissions, improve driving performance, and support increasing electrification of vehicles. DLPH supplies to OEMs seeking to make vehicles that meed and exceed increasingly stringent global regulatory requirements (reducing emission, increasing fuel economy) and satisfy consumer demands for an enhanced user experience. DLPH also offers aftermarket products.

One important example of DLPH's technology is fuel injection systems. For gasoline engine, DLPH is the leader in this thing called Gasoline Direct Injection (GDi) which provides high precision fuel delivery for optimized combustion, which lowers emissions and increases fuel economy. The industry was continuously moving to GDi in the past few years and the trend is continuing. Please read this wiki page to understand what GDi is:
I'm not going to list various technologies in DLPH's portfolio. The important thing is that they are critical for reducing emission, improving fuel economy for gasoline, diesel based engines and hybrid engines.

DLPH is well diversified geographically. FY2016 revenue $4486M was distributed as: 44% EMEA (Europe, the Middle East and Africa), 29% North America, 24% Asia Pacific, 3% South America. In terms of vehicle: 63% light vehicle OEM, 16% commercial vehicle OEM, 21% aftermarket. No customer accounted for more than 10% of net sales, top 5 customers accounted for a total of 40% net sales. FY2016 adjusted operating income was $512M (11.4% margin).

item \ year    2017    2016    2015    2014    2013    2012    average
Revenue    4849    4486    4407    4540    4398    4655    4555.83
EBIT    446    320    403    442    378    491    413.33
EBIT/Rev    9.2%    7.13%    9.14%    9.73%    8.6%    10.54%    9.07%

The above table summarizes the financial performance over the past six years. We also have 2018 Q1 results which will be discussed below. The management likes to talk about "operating income" and "adjusted operating income". Since these concepts usually mean different things for different companies, I decided to use EBIT instead. The "operating income" is basically EBIT; while the "adjusted operating income" is EBIT with restructuring and spin-off cost added back. To be conservative I will use EBIT instead of the "adjusted operating income". (continuously restructuring is part of corporate life...) I choose EBIT instead of net income because post spin-off DLPH will have about $1.5B indebtedness, which makes comparing net income before and after spinoff meaningless. So I will focus on EV/EBIT. The current market cap is about $4.4B with debt about $1.5B, so we're not in a super leveraged situation, EV/EBIT should be reasonable measure of expensiveness. Over the past six years, EBIT margin is about 10.54%. Using today's closing price and the average EBIT over the past six years, we have EV/EBIT ~ 12 (rounded up to be conservative).

DLPH reported Q1 2018 result on May 9. You can see the slides here:
Q1 2018 revenue compared with Q1 2017 increased 4.6%, and the management updated the full year revenue guidance from $4.9B - $5.1B to $5B - $5.2B, EPS guidance from $4.5 - $4.8 to $4.65 - $4.95.  At the low end of guidance EPS $4.65, the current price $50.19 has P/E = 10.8.

So, based on average numbers from the past 6 years, DLPH is currently trading at EV/EBIT = 12. FY18 P/E is about 10.8 using management's low end guidance. Pre-tax ROIC as measured by EBIT/(WorkingCapital + NetFixedAsset) is about 25%; CapEx roughly matches Depreciation & Amortization (actually slightly lower than DA) at about $200M/year.

This is a good business trading at a fair price. In the current exuberant market environment, I think DLPH's depressed share price to a large extent due to investors' irrational fear. People worry too much about EV adoption making ICE obsolete.  DLPH is in a good position to benefit the electrification of automobiles. I recommend this article to understand what electrification means. This investment hinges on the belief that ICE will not go away in the foreseeable future. There was already heated debate about this point on VIC and elsewhere so I will not add further light here; except saying that I think the most likely path of EV adoption is hybridization instead of going full electric directly. It's important to note that DLPH is a beneficiary instead of a victim of hybridization.

(1): DLPH possesses critical technologies for emission reduction, fuel economy improvement. It will benefit from tighter environmental regulations.
(2): DLPH's aftermarket service segment provides profit buffer during recession.
(3): Pre-tax ROIC 25%, EV/EBIT = 12, FY18 P/E = 10.8 gives us enough safety margin. Balance sheet is strong.
(4): CEO owns a decent amount of stock; recently there were insiders buying at $49/share which is pretty close to the current share price.


recession causing auto sales to drop precipitously

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


(1): tighter environment regulation makes DLPH's technologies more critical

(2): people gradually realize ICE is here to stay

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