Delphi is going where carmakers can only dream of driving. The $23 billion parts maker is spinning off its powertrain unit to focus on connected and autonomous vehicle technology. These fast-growing, higher-margin businesses will sport a top-tier multiple even if car sales slow.
The likes of Ford and General Motors don’t have the luxury of following Delphi’s lead. Like other suppliers, Delphi Automotive already trades at a premium to its customers’.
Before announcing its breakup plan on Wednesday, the company, headquartered in Gillingham, England, commanded a multiple of 12 times this year’s estimated earnings. Only Toyota, among major carmakers, makes it into double digits, but still falls shy.
Lofty valuation
The lofty valuation is a consequence of running businesses with better margins. Ford and GM, for example, are hitting the ball out of the park if their pre-tax margin reaches 7%. Delphi’s was 9.4% in the first quarter and may exceed 12.5% for the rest of the year, according to analysts surveyed by Thomson Reuters.
The powertrain business is a relative laggard, though, which is why Delphi is spinning it off to shareholders. The unit’s adjusted operating margin is 2 percentage points lower than the electronics divisions the parent is keeping.
Those operations also have more scope to grow revenue and boost returns as they’re in the most fast-paced part of the industry. That, of course, also means there’s a lot of competition from GM to Uber, Alphabet and Apple.
In outlining the split on Wednesday, Delphi boss Kevin Clark played up the increased focus each of the two new management teams would have as separate companies more than the immediate benefit to shareholders. Even so, investors added nearly a tenth to Delphi’s value, raising its multiple above 13 times earnings.
Virtually all carmakers have their own connected and autonomous driving units and investments. Some might even hold more value than Delphi’s. Ford Chief Executive Mark Fields, for example, is targeting margins of 20%.
Trouble is, they’re too small a part of the overall business and too integral to their hopes of transforming from carmakers into what Fields calls mobility companies to stand on their own anytime soon. For now, that leaves Delphi’s customers only watching as it speeds off.
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
