Yahoo Finance Why Delphi Technologies PLC (DLPH) Is One of the Best Stocks to Buy for 2018
Each year, U.S. News scours Wall Street's vast landscape and carefully selects a group of seven stocks that are well-positioned to outperform the markets, both individually and as a portfolio. After careful consideration, Delphi Automotive PLC (NYSE: DLPH) was selected as one of the seven best stocks to buy for 2018.
[Read: The Best Way to Invest in the Auto Industry: The Suppliers.]
That stock, technically speaking, doesn't exist anymore.
When Delphi was identified in November as one of 2018's best stocks to buy, Delphi was about to spin off one of its businesses, creating two distinct publicly traded companies. In fact, that was one of the biggest reasons the stock was picked.
Spinoffs, when most effective, provide two real services to investors. First, they allow each new company and, importantly, the management of each organization, to focus on what they do best. Secondly, spinoffs allow the stock market to value each business independently and according to its growth prospects. This can often unlock value for shareholders.
The DLPH--APTV spinoff unlocked value. Delphi Technologies was the smaller legacy powertrain division that was technically spun off from the original company, despite keeping the "DLPH" ticker symbol. It has a market capitalization of $5 billion.
Aptiv PLC ( APTV), the remaining post-spinoff company, is more focused on the electric component of cars, operating in two segments: electrical or electronic architecture, and electronics and safety. Aptiv is expected to produce software and safety systems that will be integral in the evolution of autonomous driving technology and connected cars. With a market value north of $24 billion, Aptiv is in some ways a pure play on self-driving technology. In October, Delphi Automotive bought a highly sought self-driving startup called NuTonomy for $450 million, roughly doubling its driverless car division. Today, NuTonomy is a part of Aptiv.
NuTonomy's advanced expertise in the area will be used to fast-forward APTV's eventual development of a self-driving taxi fleet that will hit the streets of Singapore in 2019.
While buying Delphi Automotive stock would have been a decent way for an investor to bet on the self-driving car trend before the split, it could also dissuade reasonable investors from doing so simply because the low-growth, legacy powertrain business was also attached. Conversely, investors who might have originally invested for the tried-and-true, low-uncertainty powertrain business could be turned off by the higher price-earnings multiple DLPH was developing due to its exciting autonomous vehicle hype.
Why DLPH is still a steal. Here's the point: The spinoff was smart, but you can't buy the same DLPH stock that existed before the spinoff. You can artificially create it, though. If you buy three shares of APTV for every share of DLPH that you buy, you can simulate exactly what you would own if you simply bought a share of the old Delphi Automotive PLC.
[See: 7 of the Best Blue-Chip Stocks to Buy for 2018.]
At current levels, it's tough to go wrong with either stock, or to err with the put-it-back-together strategy described above.
That said, if you want to tweak the original buy recommendation, you can. DLPH -- the powertrain business -- looks like a particularly good buy right now.
Here are some things Delphi Technologies stock currently has going for it:
-- The stock market, in the ninth year of a steady upwards march, is beginning to boil over with expensive stocks with stretched valuations. The best long-term opportunities are likely to be under-the-radar rather than crowded, cultish trades.
-- Gasoline-powered vehicles aren't going anywhere anytime soon. While most experts expect more than 50 percent of new vehicle sales will be all-electric by 2030, that's over a decade away -- and even then, that's only new car sales. The fleet of cars used on the road won't turn majority electric until years or perhaps decades later. And when it does, Delphi has a strong electric unit as well.
-- None of Delphi Technologies' end customers constitute more than 9 percent of its revenue. In 2016, Daimler, GM (GM) and Hyundai each accounted for 9 percent of sales. End users also vary across industries: Caterpillar (CAT), AutoZone (AZO) and Cummins (CMI) are also big customers, with each accounting for 2 percent of sales.
-- DLPH is also well-diversified across geographical end markets. Forty-four percent of revenue comes from Europe, the Middle East and Africa; 29 percent from North America; 24 percent from Asia Pacific and 3 percent from South America. DLPH uses its global footprint to allocate production more efficiently in countries where it can get the best deal.
-- DLPH shares go for just 12 times forward earnings. Aptiv stock, on the other hand, goes for nearly 18 times forward earnings. Despite analysts expecting 9.7 percent earnings per share growth from DLPH in 2018, this compared to just 6.6 percent EPS growth from APTV.
Conclusion. Delphi Automotive shares don't exist anymore. You can "create" them by buying three shares of APTV for every share of DLPH, and that's not a bad idea. The self-driving and electric car space is a long-term winner.
But autonomous vehicles also won't get to scale overnight, and high expectations combined with stiff competition to be the first mover make it a tougher area to pick winners than most investors might think.
[See: 7 of the Best Tech Stocks to Buy for 2018.]
Post-spinoff, the better bargain right now is DLPH, the smaller, less exciting powertrain arm of the old combined business. Not only is it a solid, well-diversified company with a newfound ability to concentrate on what it does best, but shares are trading on the cheap. In a market not exactly teeming with bargains, that's a rarity.
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