When it comes to investment theses, my view is the simpler the better. Better because the fewer assumptions I depend on, the lesser the chance I’ve made some fundamental error in calculation or my understanding of the company and its industry. I’ve no need for spreadsheets with twenty tabs modelling gross margins for the next decade, or for novel-length PDFs with detailed biographical data of every middle manager. I look askance at projections longer than three years or so into the future, because the future so stubbornly refuses to conform to my wishes and predictions.
Visteon Corporation is an example of a simple investment thesis. Visteon is a supplier to auto manufacturers worldwide. Its biggest customers are Hyundai/Kia and Ford, and its chief products are climate control and electronics parts and systems. While Visteon has rapidly transformed its business, the market has failed to adequately recognize the progress. The case for investing in the company relies on only a few facts and assumptions.
- Visteon is overcapitalized and plans to return that capital to shareholders through a massive share repurchase. The company is authorized to repurchase $1 billion in shares by December, 2015, good for 26.2% of shares outstanding.
- Visteon has streamlined and focused its lines of business down to its highest-margin, fastest-growing operations: climate and electronics. Exiting slower-growing, lower-margin operations should merit a higher market multiple on the restructured business, yet Visteon trades at a very low multiple of projected results.
And that’s the whole of the thesis. Now allow me a little time to unpack each point.
Due to the recently announced sale of a significant division, Visteon is soon to be swimming in cash. In August, Visteon announced the sale of its portion of the Yanfeng Visteon Automotive Trim Systems joint venture to its Chinese partner. As part of the transaction, Visteon will assume majority control of the joint venture’s automotive electronics unit. The transactions will take some time to be finalized, but Visteon expects to receive $1.1 billion in cash before the end of the calendar year, then another $110 million in June 2014 and $14 million in June 2015. The transaction was born of Visteon’s desire to exit its automotive interiors businesses and focus on the more lucrative climate and electronics lines. Visteon intends to return nearly the entire proceeds of the sale to shareholders via share repurchases over the next two years.
Visteon has helpfully provided EBITDA estimates for 2014, adjusted for the sale of its joint venture stake. In 2014, Visteon expects to earn between $600 million and $640 million in EBITDA, adjusted for equity in affiliates and minority interests.
But what should Visteon be worth? Others may use different metrics, but I generally value capital intensive, cyclical industries at around 6x mid-cycle EBITDA. A 6x multiple on 2014 EBITDA would equal $96.92-$101.69 per share for Visteon.
However, there is a good case for valuing Visteon at a premium. Both of Visteon’s core divisions are projected to enjoy strong growth: 7%+ for climate and 12%+ for electronics, according to Visteon’s internal projections. And Visteon has realigned its business to emphasize attractive geographic regions. The Halla Visteon climate segment does 59% of its business in Asia Pacific markets and the electronics segment will do 37% there post the joint venture transaction, more than it does in either North America or Europe.
Asia is Visteon’s focus, so much so that the company is reportedly exploring transferring its stock listing to Hong Kong. From a bloomberg.com article:
“’In Asia, where the bulk of our business is and the bulk of the automotive industry is, this is a growth industry, but we’re not getting growth multiples,’ Chief Executive Officer Tim Leuliette said in an interview after a Bloomberg auto forum in Southfield, Michigan, yesterday. ‘We need to start being valued on where we do business, not where we’re domiciled.’”
And that’s the whole pitch. I could go on and talk about Hyundai’s increasing success or the margin expansion that Visteon projects, but none of that is necessary to see Visteon’s value. Despite good growth potential, Visteon trades at a depressed multiple. Shares should benefit as the market recognizes this growth potential, and as the company hoovers up shares by the millions. I strongly recommend checking out Visteon’s investor relations page, where it archives presentations it has made at various investment conferences.
One more wrinkle – Visteon has a series of warrants outstanding, trading under the symbol VSTOW. These warrants have a strike price of $58.80 and expire in October, 2015. These warrants could be attractive to investors looking to leverage Visteon’s stock cheaply.
Accounts that I manage hold Visteon warrants.