The “Idea of the Month” for May, which is fast coming to a close, is automotive electronics — and I think we have two interesting options that I’m interested in buying (I don’t own either right now).
First is Visteon (VC), an idea which has been kicked around in value investing and “special situations” circles for a little while but is looking pretty attractive to me now (I don’t yet own it) even though it’s much more of an “underappreciated growth” story than it is a “value” story. This is a pretty weak company that has dramatically reorganized to make itself stronger, and they have some strong growth potential in an industry where, despite their long history, they’re a pretty small upstart right now.
And second is NXP Semiconductors (NXPI), which is a large and pretty diversified chipmaker I’ve written about many times over the years — mostly because it has been teased for its large market share in NFC chips (like those used in cell phone payments). Where Visteon is making big inroads in the systems and dashboard displays and controls for automobiles, NXPI, after its recent Freescale acquisition, is dominating the semiconductor guts that control almost everything in modern cars. And NXPI has a more established growth trajectory and a cheaper forward valuation (12X 2017 earnings forecasts vs. 16X for Visteon), though there’s certainly risk as well given the size of that Freescale acquisition and the work involved in integrating the two companies.
NXPI is an easier story, and a more comfortable stock to recommend, but both companies are essentially in the middle of refocusing and reorganizing to get more of their revenue from industries that are facing strong secular growth trends — mobile, security and increasingly electronic automobiles.
I think buying a bit of both of these stocks will provide solid exposure to the connected car market, and both have at least some earnings visibility that provides a little bit of confidence — they are both at risk if we are really at “peak automobile” as some folks have suggested, with the argument that we won’t see any more volume growth from the big carmakers, but they won’t necessarily be as at risk as some might fear because the trend toward more electronics in automobiles, and toward more sophisticated cockpit electronics, is very strong and growing much faster than the actual automotive ...