In this article, let's take a look at Delphi Automotive PLC (DLPH, Financial), a $20.66 billion market cap U.K.-based company that is a leading supplier of automotive components for global vehicle manufacturers.
Key drivers
It operates through four segments: electrical/electronic architectures; powertrain systems; electronics and safety; and thermal systems. The first segment constitute about a half of 2013 sales, showing its relative weight on the firm´s operations.
The company´s innovation is well known despite the fact some troubles it has faced in the past. The bankruptcy and then operating as a private company, the firm reduced its U.S. operations while maintaining international focus.
By regions, Europe, Middle East and Africa was the largest region (39% of 2013 sales), United States (32%) and Asia Pacific (22%). This last region could be the faster-growing region in the upcoming future.
After the four years of bankruptcy, we believe it is going to grow sales at a faster pace than the average rate in the industry. This is due to the ability to innovate products that should bolster sales growth. Further, low-cost countries should contribute to better returns.
Revenues, margins and profitability
Looking at profitability, revenue grew by 3.16% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.02 vs $0.87). During the past fiscal year, the company increased its bottom line. It earned $3.89 versus $3.32 in the previous year. This year, Wall Street expects an improvement in earnings ($5.07 versus $3.89).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| DLPH | Delphi Automotive | 44.58 |
| LEA | Lear Corp | 15.87 |
| ALV | Autoliv Inc | 10.77 |
| Â | Industry Median | 10.16 |
The company has a current ROE of 44.58% which is higher than the industry median and the ones exhibit by Lear Corp. (LEA, Financial) and Autoliv (ALV, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 16.3x, trading at a discount compared to an average of 16.9x for the industry. To use another metric, its price-to-book ratio of 7.15x indicates a premium versus the industry average of 1.54x while the price-to-sales ratio of 1.25x is above the industry average of 0.68x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
It has demonstrated a pattern of positive earnings per share growth over the past years.
Final comment
We believe the auto parts and equipment sub-industry will remain profitable, primarily due to the rising demand in the U.S. and international markets. We see more upside potential for this stock, despite it has already risen over the past year. Further, the PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Robert Olstein (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014, as well as Signature Select Canadian Fund (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
