Jeff Brown over at Bonner and Partners is launching a new newsletter called The Near Future Report, which sounds like it’s the “entry level” letter (currently offered at $75) to go with his pricier Exponential Tech Investor, and the first bait they’re dangling for new subscribers is a fat, juicy promise of a stock that “could do even better than Nvidia.”
So, naturally, we want to know what he’s talking about — Nvidia, after all, has been an incredible stock market darling for almost two years now, going from $20 to $160 thanks to its connection to so many hot trends (data center upgrades, artificial intelligence, virtual reality and gaming, and self-driving cars). I even own a few shares myself, despite the fact that I still get a little tremor in my hands when I think about the current valuation (30X 2020 earnings estimates).
The promise of that next Nvidia is what is driving questions our way, but the hook that actually gets readers to open Brown’s promo emails is the headline…
“New Research Says Your Cell Phone Could Kill You…
(And it has nothing to do with radiation or cancer)
“The Centers for Disease Control warns that cell phones are the cause of a rapidly spreading epidemic. It kills one person every 24 seconds. And it’s growing faster than cancer, heart disease and diabetes – combined.
“Here’s everything you need to know to protect yourself from this ‘cell phone’ disease – including details on a potential miracle cure.”
The story that spins out of that intro is basically one about “distracted driving” causing an increase in car accidents — fatalities from auto accidents have been falling for years in the longer-term trendline, probably because of safer cars and more public awareness of things like drinking and driving and seatbelts over decades, but there’s been an uptick of accidents in the “texting and driving” era when we all have computers and movie screens distracting us in our dashboards and phones chirping temptingly at us from the cupholder.
So the “vaccine” for auto fatalities is, as you’ve probably already guessed, more safety equipment — in the form of “self driving cars” or, as we evolve to really autonomous machine driving, what Brown calls “help driving cars.”
A lot of this technology is already in vehicles, particularly the more expensive luxury cars where most new gadgets are first released — and it is helpful, with the lane change alerts and the heads-up displays and whatever else. Though I almost caused an accident last time I rented a car and the lane-change alert vibrated my right buttock when I was too close to the white line and scared me half to death.
Then we start to get to the real hintification about what exactly Brown is recommending…
“Now, there’s a new player about to enter the self-driving car market. And that stock could do even better than Nvidia.
“By the end of 2017, I expect a government mandate will be passed that requires all American cars have the ability to communicate with each other, using advanced computing power to process that information and avoid accidents – all in a split second.
“And this company is going to become one of the biggest players in self-driving technology.”
OK… what other hints does he drop for us?
“Its parts have already been used to drive a car from San Francisco to New York, with 99% of the driving done by the car itself, thanks to this company’s advanced technology.
“It’s already partnered with BMW. And in the next year, its parts could find their way into almost every car manufactured in America – thanks to this government mandate….
“While ‘hot’ driverless tech companies like Nvidia and Mobileye’s shares are valued around 30 times their expected revenue…
“This company’s shares are only at 1.6 times its expected revenue.
“Put simply, when the mainstream finds out about this company – likely after the government mandate is announced – there’s a reasonable chance its valuation could climb 3,000% or more!
“… the company I think is best positioned to profit when the U.S. government V2V communication mandate is passed. This company’s parts are critical to V2V functions and will soon be required on all cars. That means this company is about to claim a large chunk of the $2 trillion automobile market. This stock could climb exponentially in the next few months alone.”
So who is it? Well, we tossed all those clues into the Mighty, Mighty Thinkolator… and as long as you scrub away the iffy hype (there’s no “reasonable chance” that it “could climb 3,000% or more!” anytime soon), the best match for the clues is… good ol’ auto parts giant Delphi Automotive (DLPH).
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Delphi was probably the first wave of the collapse of the over-levered auto industry in the 2000s — it was spun out by GM back in 1999, then went into bankruptcy protection in 2005, well before GM and Chrysler had to be bailed out, and they came out of bankruptcy in reasonably good shape in late 2009 and went public again in 2011. Since then they’ve been growing their revenue pretty steadily, as you would expect for a major supplier during years when global auto sales spiked to new records (though Visteon (VC), which spun out of Ford much the way Delphi spun out of GM, has not ramped up sales as rapidly)… and they’ve done a pretty decent job operationally if you go by their income statements, with operating margins pretty consistently in the double digits while competitors like Magna and Visteon mostly post operating margins in the 6-8% range.
But that doesn’t mean they’re a lights-out growth story, nor that they have the same leverage to exciting growth stories as chipmakers or individual component names do –though you can argue that they’re more levered to the electronics and safety components in the car than they used to be, since they’ve been acquiring electronics, safety and sensor technology companies over the past few years and are in the process of spinning out their large powertrain business into a separate company. You can see a bit of their strategy and their current portfolio makeup in their latest quarterly earnings release presentation here.
Why is this a match?
Well, Delphi did recently run a test of their autonomous driving technologies with a run from San Francisco to New York, and the car was reportedly in fully autonomous mode 99% of the time for that 3,400 mile trip.
And Delphi certainly doesn’t have the only “V2V” communication system on offer, but it was the self-proclaimed first to market with this kind of communication system back in 2014, with some cars having it this year, added a collaboration with Mobileye last year, and may, according to some sources, provide the first viable “V2V to the masses” technology that could be rolled out in most cars fairly quickly, including, as announced at the Consumer Electronics Show, a new system in production with Cadillac this year.
V2V, by the way, is a reference to “vehicle to vehicle communication” — a standard within which cars can broadcast and receive basic safety information (speed, location, braking) that helps them react or provide driver alerts (like, “that car’s not going to stop at that stop sign” or “the car in front of you is slowing down rapidly”), and also encompasses ideas like “V2I” vehicle to infrastructure communication that can allow your car to know, for example, whether a light is going to turn red before you reach it. This communication standard has been hashed out for years and is widely considered to be a major safety breakthrough, once a large enough cohort of connected cars are on the roads, but it’s also not necessarily a settled standard or one that will advantage Delphi over other competitors in the long run.
Delphi’s page that explains their V2Whatever technologies is worth a quick browse here. And there are proposed rules and standards for V2V, including a mandate for V2V capability in all new light vehicles that was proposed late last year, though there are also plenty of folks in opposition and I have no idea what the process of new Federal rule making is like in this administration (there is as yet no nominee to head NHTSA, as far as I know, so it’s hard to guess at where this is in their priorities list).
And, yes, Delphi is trading right now at about 1.6X 2017’s expected sales of $16.98 billion. Which, in case you don’t feel like doing the math, means that Delphi is pretty big — it has a market cap today of $22.6 billion at $84.50 a share.
So I’d be really surprised if any announced new mandate for vehicle safety technology results in Delphi shares doubling in the next six months, or anything crazier than that, but it is a global company and it is growing, and if global auto sales don’t fall into the ditch it is reasonably valued… with some possible upside coming if the shares get re-valued after it becomes more clearly a technology and electronics company when they spin off their drivetrain unit this Fall (that’s the plan, anyway, they said they’ll provide more detail after the second quarter earnings release, which should be in late July).
The shares are fairly cheap right now, so I would caution you not to think about it as a nosebleed tech growth stock that can gain 1,000% or 3,000%… it’s probably not ever going to trade at 20 or 30X sales like some of the hot chip companies do… but that doesn’t mean it’s a bad investment. Right now, Delphi shares are trading at less than 12X 2018 earnings estimates — and there are 24 analysts who cover Delphi, with estimates that have generally been pretty close over the past year, so they probably aren’t all that far off… unless auto sales collapse surprisingly fast and revenues get gutted at all the suppliers.
So it’s an interesting name that I haven’t looked at very closely before. They’ve been buying back shares, they have plenty of cash flow to support the small dividend (1% or so) and invest in growth, their debt level is quite manageable, and they have put together a pretty nice collection of autonomous driving technologies over the years even as they’ve divested themselves of a number of less-growthy divisions, so it could certainly be that the stock has some growth potential just from a growing realization of that trend — particularly after the powertrain division is spun off, which will probably generate some more attention late this Summer.
The big moves in auto parts tend to be fairly slow — it takes years to get your parts or systems designed into a car, ramp up production, and finally generate some profits, but it’s certainly possible for the “story” of a company to change more quickly than that and cause investors to pay steeper prices for the shares. It’s possible that this could happen with Delphi, and may already be happening to some degree as their latest technologies roll out in this year’s Cadillacs… but the stock isn’t expensive compared to the peers I looked at, or compared to the overall market.
Just about all automakers and suppliers are trading at what look like pretty discounted valuations compared to their near-term profitability and growth rates, and I suspect that’s mostly because of skepticism about “peak auto” and a fear that global auto sales will go into decline for a meaningful period of time… I’d be skeptical about those kinds of broad market projections, myself, and take more solace in the estimates of auto analysts that rely on the assessment for individual design wins, model sales, and company operations, but that doesn’t mean that the big-picture prognosticators are necessarily wrong. If auto sales fall sharply for a few years, all the suppliers will probably do poorly.
That’s my take, at least — Delphi is the best match for this teaser that I can find, and it’s a reasonable “old economy” auto supplier stock with an increasing and perhaps underappreciated focus on electronics and autonomous driving. Whether or not it’s going to soar this Fall, or rise to a nosebleed valuation like Nvidia or Mobileye did because (at least partly) of the enthusiasm for self-driving cars, I don’t know… but I wouldn’t mind looking seriously at it here.
And I’ll leave you there, for now — it’s your money, so what do you think? Interested in Delphi, or in other automotive suppliers? Have worries, risks or opportunities that apply to these folks that I haven’t noted above? Please let us know with a comment below.
Disclosure: I own shares of Nvidia. I am not invested in any other company mentioned above, and will not trade in any covered shares for at least three days per Stock Gumshoe’s trading rules.