CAR Management Briefing Seminars Rewired For Success: Is the Industry Sustainable for Capital

Transcription

1 CAR Management Briefing Seminars Rewired For Success: Is the Industry Sustainable for Capital Creation? August 2017 Matthew T. Stover Brendon E. Mason Andrew J. Crespo Susquehanna International Group, LLP (SIG) is comprised of affiliated entities, including Susquehanna Financial Group, LLLP (SFG). SFG is a provider of research and execution services. SFG is a member of FINRA. Please refer to page 27 for important disclosures and certifications.

2 Today s Agenda Section I. So much has changed (industry structure) but so much remains the same (cycle, margins & valuation). Section II. CAR.x is upon us. In aggregate terms, the inflection point has been neutral but at the stock level it has been a massive differentiator. Section III. Parting thoughts from an investor this seems an important time to balance risk vs reward. 2

3 The market is a Discounting Mechanism that Balances Across Three Axes EFFORT Returns Valuation CAPITAL Growth Source: SFG Research Predictability TIME 3

4 EV/EBITDA We Think The Auto s Are Getting Punished For Lack Of Predictability 14.0x 13.0x 12.0x 11.0x Utilities Materials Healthcare Industrials Consumer Discretionary Consumer Staples Tech 10.0x Financials 9.0x 8.0x AUTOMOTIVE 4 7.0x Telecom 6.0x ROIC % Source: SFG Research, FactSet

5 Units, Million Despite Volume Growth and Shift East, Cyclical Concerns Loom APAC Eurozone NA SA 5 Source: SFG Research, AutoForecast Solutions LLC

6 In China, Investors Don t Know What to Make of the Cycle 35,000,000 China Production e 4,000,000 China 2016 Production by OE 30,000,000 3,500,000 25,000,000 3,000,000 20,000,000 2,500,000 15,000,000 2,000,000 10,000,000 1,500,000 5,000,000 1,000, ,000 0 Source: SFG Research, AutoForecast Solutions, LLC Source: SFG Research, AutoForecast Solutions, LLC 6

7 mil. units Duration - Years Unfortunately, In The Key NA Market The Market Has Strong Opinions UPTURN 8? Volker Moment DOWNTURN??? -10 Source: SFG Research, Ward's Automotive Source: SFG Research 7

8 OEM Margins Have Peaked 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Ford: Operating Margin - Auto 15% 10% 5% 0% -5% GM: Operating Margin - Auto -2.0% -4.0% -6.0% -8.0% -10% -15% -20% Source: SFG Research, FactSet Source: SFG Research, FactSet 8

9 and so, too, have the Supplier Margins. 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% Supplier EBITDA % US '01-'16 EU '01-'16 JN '01-'16 9 Source: SFG Research, Company Reports, FactSet

10 Relative Valuation to SP500 % Bottom Line Market Sees Auto s Through Historical Valuation Crucible Not Likely to Change Until a Recession 120% 100% 80% 60% 40% 20% 0% Pre-Tech Bubble Pre-Crisis Current Growth Value OEM Source: SFG Research, FactSet 10

11 Today s Agenda Section I. So much has changed (industry structure) but so much remains the same (cycle, margins & valuation). Section II. CAR.x is upon us. In aggregate terms, the inflection point has been neutral but at the stock level it has been a massive differentiator. Section III. Parting thoughts from an investor this seems an important time to balance risk vs reward. 11

12 CAR.x Is the Big Question Hanging Over the Future Outlook for Auto Autonomy/ Technology Electrification/ Regulatory TaaS/ Behavioral 12

13 Remember Amara s Law When Opining On Future We tend to overestimate the effect of technology in the short run and underestimate the effect in the long run -Roy Amara 13

14 MBLY TSLA VC DLPH FCAU DAN BWA TEL ST LEA ADNT SP50 MGA SHLO THRM GM SMP CPS ALV CTB F TEN TOWR GNTX AXL SUP Stock Price YTD Return The Market is Favoring Stock s Leveraged to CAR.x 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% 14 Source: SFG Research, FactSet

15 Investors & Executives Ask if it Has Gone Too Far? $120 $100 $80 $60 $40 $20 $- Regional Champs Enterprise Value ($ bil.) Contenders 15 Source: SFG Research, Factset

16 Maybe we need to change our perspective $1,200 Enterprise Value ($ bil.) $1,000 $800 $600 $400 $200 $- OEM/Supplier 1 Tesla 2 16 Source: SFG Research, Factset

17 Autonomy: Investor Perception Positive Current View Inevitable Vehicle Autonomy vs Autonomous Vehicles? Suppliers: Content opportunity OEM s: Revenue opportunity Non-Auto Players hunting for their position How could we be wrong? Non-Auto player could be the disruptor Delayed timing Regulatory delays Infrastructure build out Regulatory demand creates adverse pricing environment 17

18 Electrification: Investor Perception Negative Current View Growing Sense of Inevitability Fixed / Variable cost pressure Disruption of Current Industry Order By Company (TSLA) or Government (China) Labor Risk How could that View be wrong? Commonization Outsourcing opportunity for Suppliers Long term opportunity to improve capital returns for OEM s 18

19 TaaS (Transportation as a Service): Investor Perception Confused Current View Inevitable Everyone wants to be a player: OEM, Supplier, Dealer & Rental, Tech, Government Data is Gold What is the pick axe? Industry unit volume production will decline but $ value likely to go higher How could we be wrong? Heterogeneity of market could lead to slower than anticipate adoption curve Business Models are Complex Slower than anticipated adoption curve some fundamental problems have not been addressed 19

20 Today s Agenda Section I. So much has changed (industry structure) but so much remains the same (cycle, margins & valuation). Section II. CAR.x is upon us. In aggregate terms, the inflection point has been neutral but at the stock level it has been a massive differentiator. Section III. Parting thoughts from an investor this seems an important time to balance risk vs reward. 20

21 Investment Rates are Climbing Articulate the Magnitude of Growth Spending The Market Can Look Forward. 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% CEX % RDE % CEX % RDE % Source: SFG Research, Company Documents Source: SFG Research, FactSet OEMs Suppliers 21

22 AXL ST TOWR ADNT DAN TEN TEL BWA DLPH CPS MGA LEA ALV THRM SUP GNTX VC GNTX ST TEL AXL DLPH BWA THRM SUP ALV VC CPS DAN LEA MGA TEN TOWR ADNT EBITDA % If Stable Cycle Prevails, Growth Investment Can Be Funded 4.0x 3.0x Net Debt/EBITDA 40% 35% 30% FCF% = EBITDA % - CEX % 2.0x 25% 1.0x 20% 15% 0.0x 10% -1.0x -2.0x 5% 0% FCF % CEX % Source: SFG Research, FactSet Source: SFG Research, FactSet 22

23 YTD 2017PF YTD 2017PF Think Through the Downside and Please Don t Bet the Ranch Chasing Unicorns Consider Adoption of a PE Approach Number of Transactions 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Transaction Value ($ mil) Source: SFG Research, FactSet Source: SFG Research, FactSet 23

24 Closing Thoughts The industry cycle is shifting and the market sees the industry through a historic valuation crucible. CAR.x is complex and will take time Manage capital with respect to risk not just reward Industry may want to adopt PE model to access liquidity and manage risk. THANK YOU VERY MUCH 24

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