To The Moon

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Introduction

Ever noticed how some investment gems often hide in plain sight? Think about it. For instance, big, powerful car brands like Tesla (TSLA), Ford (F), and Honda (HMC) grab our attention effortlessly. Spotting a rising car brand is straightforward. You'll see more of their cars on the streets, and their marketing campaigns amplify their presence.

Yet, we often overlook the companies behind the components that power these vehicles. Visteon Corporation (NASDAQ:VC) is one such under-the-radar gem. While the name might not ring a bell, there's a good chance you've interacted with their product. They're the brains behind the digital cockpit – that sleek display showing speed and other vital data – in many cars, trucks, and motorcycles. As a dominant force in this niche, Visteon has been riding a wave of positive industry trends, consistently boosting its revenues and earnings. It's high time Visteon stock made it to your radar.

Earnings Growth

Visteon specializes in making digital instrument clusters, domain controllers integrated with ADAS (advanced driver assistance systems), displays, Android-powered audio and infotainment systems, and battery management systems (BMS) for a broad range of vehicles, for cars, trucks, and motorcycles. Their clientele features globally renowned car manufacturers such as Ford, BMW (OTCPK:BMWYY), General Motors (GM), Honda, Toyota (TM), Mercedes-Benz (OTCPK:MBGAF), Mazda (OTCPK:MZDAY), Mitsubishi (OTCPK:MSBHF), Nissan (OTCPK:NSANY), Renault (OTCPK:RNSDF), Volkswagen (OTCPK:VWAGY), and Harley-Davidson (HOG). Over the past three years, Ford stands out as Visteon's largest customer, contributing to 22% of its annual net sales. Nevertheless, outside of Ford, no other company exceeds 10% of Visteon's total sales.

Benefitting from the auto industry's shift from analog to digital—including device and cloud connectivity—Visteon has effectively leveraged this evolution. It's notable that the management has adeptly navigated this change, propelling sales of their digital clusters, which now constitute about 70% of all cluster sales. This is a significant uptick from 2019, where such sales comprised less than 20%. The rapidity of this digital transition means that the demand for Visteon’s offerings is expanding at a rate that surpasses general vehicle production figures. Consequently, Visteon has seen robust growth in its revenues, outshining wider industry trends.

I believe one of Visteon’s defining strengths lies in its superior product line. Particularly, its digital clusters, Android-operated infotainment systems, the standout SmartCore cockpit domain controller, and the BMS have garnered substantial appreciation. This acclaim comes from its esteemed customer base, which includes some of the biggest names in the automotive sector, as mentioned earlier.

In the first half of this year, Visteon reported a commendable 17% YoY revenue growth, reaching $1.95 billion. This growth stands out, especially when juxtaposed against broader industry growth metrics. While the total industry vehicle production witnessed a 6% growth in Q1-2023 and a 16% ascent in Q2-2023, production from Visteon’s primary clients saw a 9% rise in Q1-2022 and a 12% increase in Q2-2023. Whichever angle one considers, Visteon's growth surpasses the market average. Impressively, the company now boasts a streak of 17 consecutive quarters where it outpaced market growth.

For H1-2023, Visteon's GAAP EPS exhibited a 16.5% YoY growth, settling at $1.91. Concurrently, its adjusted EBITDA climbed by 26% to reach $189 million. Despite this, the adjusted EPS remained relatively unchanged at $2.44 per share. It's important to highlight that these adjusted figures factor in an exceptional product recall charge totaling $15 million. Despite the substantial recall charge, which typically weighs down a company's earnings, Visteon confidently maintained its full-year adjusted EBITDA forecast, projecting a range of $405 to $445 million, a considerable increase from the previous year's $348 million.

Looking Ahead

In my view, Visteon appears well-positioned to sustain its revenue and earnings growth trajectory, underpinned significantly by robust demand. This demand's vigor is evident as Visteon secured a remarkable $2.5 billion in new business orders in the second quarter alone, marking a historic high. Accumulating $4 billion in new orders in the first half of this year, it hints at a promising outlook for the company's upcoming revenues and earnings. With such momentum, I believe Visteon is on track to comfortably surpass its annual goal of clinching $6 billion in new orders.

In terms of product rollouts, Visteon's products were introduced 34 vehicle model in Q1 and another 35 in Q2. With additional launches anticipated in subsequent quarters, this paves the way for growth throughout the latter half of the year. Worth highlighting is the company's mounting focus on electrification initiatives, like BMS, which began escalating in the second quarter. The momentum in this segment is projected to further amplify in the second half of the year.

Of particular note, a large chunk of the second quarter's new bookings, valued at $1 billion, primarily stemmed from the burgeoning electrification products, gaining momentum alongside the expanding EV domain. Visteon is witnessing an uptick in orders from EV manufacturers, encompassing a product range beyond just BMS. The digital cockpit, for instance, is seeing an influx of orders predominantly from the EV makers. In fact, in the first half of 2023, roughly one-third of all digital cockpit orders were geared towards EVs. Last quarter, Visteon achieved a significant landmark by securing its inaugural order for EV power electronics from a European OEM. I believe that this electrification push will be pivotal in steering Visteon's future growth, especially as EV manufacturers ramp up production to fulfill their yearly targets.

As Visteon capitalizes on the uptick in electrification program throughout the latter half of the year and builds on its H1 product launches, I believe the company seems primed to sustain its growth in revenues and earnings, outpacing market trends. Given the acceleration in electrification, I anticipate Visteon's growth trajectory during the second half might even surpass that of the first.

Furthermore, I think Visteon's flagship product, SmartCore, could remain a potent force in propelling sales. In the prior quarter, it experienced a notable 45% growth, ascending to the position of the company's second leading product, trailing only digital clusters and outdoing displays. Recent launches with prestigious brands like Mercedes, the Chinese automotive giant Geely Auto, and India's Mahindra & Mahindra, coupled with additional releases in the near future, suggest SmartCore's growth might remain vigorous.

It's also imperative to highlight that Visteon, mirroring numerous peers in the expansive automotive arena, grappled with semiconductor supply chain disruptions. These complications impacted Visteon's operational outcomes by curbing its production capacity and necessitating costlier semiconductor acquisitions from the spot market to cater to its clientele's needs. However, the operational landscape has shown marked improvement in H1-2023 compared to the same period last year. Consequently, Visteon has significantly scaled back its spot market purchases, aligning more closely with customer requirements. The easing of these supply chain challenges bodes well for Visteon's forthcoming performance.

Takeaway and Risks

Visteon projects an 8% revenue growth and a 22% surge in adjusted EBITDA for 2023. Given the robust demand for electrification, the digital cockpit, and the SmartCore products, coupled with the resolution of previous supply chain constraints, I believe the company appears well-positioned to meet these objectives and foster further growth. This uptick in revenue and earnings could bolster the company's share value. Yet, with a valuation at 20.3x forward earnings and 14.2x projected cash flows, Visteon's stock isn't quite a steal at present. It's trading at a marked premium compared to the sector’s forward P/E and P/CF, which stand at 14.8x and 8.5x, respectively, as per data from Seeking Alpha. Given the current price, I'd categorize the stock as a 'hold' and would advise potential investors to contemplate an acquisition during market dips.

However, it's paramount to recognize the inherent risks shadowing Visteon, which could negatively influence its future trajectory and, in turn, its stock value. The most pronounced threat, in my opinion, emanates from the fluctuating macroeconomic climate. While Visteon has reaped benefits from the upswing in vehicle production, primarily driven by pent-up demand and inventory replenishment, these factors may wane over time. Concurrently, rising inflation and elevated interest rates could step into the picture. This might decelerate or even reverse the growth in vehicle production. Even though Visteon might still surpass market performance under such conditions, its overall growth could face challenges, potentially pushing its shares lower.