Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Self-Driving Cars Will Drive 1 Stock Higher and Cripple Another

By Daniel Miller - May 11, 2017 at 4:22PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The autonomous vehicle revolution will bring a host of changes -- some obvious, some less so. You can probably guess why it'll boost Delphi Automotive, but you might not have considered why it'll crush Axalta.

Investors sifting through the automotive sector for stocks poised to thrive over the coming decades as the industry evolves toward driverless vehicles don't have many options. Arguably, the best autonomous-vehicle pure play was Mobileye, which develops camera-based vehicle vision systems for a multitude of major automakers, but the company recently agreed to be acquired by Intel

For those looking at auto industry suppliers with their eyes on the future, here is one stock to seriously consider and one company that could face a slow death thanks to the rise of autonomous vehicles.

Turning into a loser?

Axalta Coating Systems ( AXTA -0.66% ) is coming off a decent first quarter, but you should likely avoid this stock over the long term. In 2016, this vehicle coatings manufacturer generated 59% of its sales from its performance coatings segment, which sells the finishes used at body shops, independent shops and light-vehicle dealerships, among other areas. The other 41% of its sales were generated from its transportation coatings segment, which focuses on OEMs, such as the Detroit automakers.

Here's the long-term problem for Axalta: Because between Axalta's two business segments roughly 60% of its business is reliant on cars needing refinished coats after crashes, its future is in jeopardy as the industry is marching toward driverless vehicles, which are expected to steeply reduce the number of car accidents. And that isn't a headwind that will turn up suddenly in 20 years once most vehicles become completely autonomous; it's a headwind that will have an immediate, albeit slowly increasing, negative impact. Vehicles are already being loaded with technology to make driving safer, such as lane control, blind-spot sensors, and driver assist.

The inside of an autonomous vehicle, with a laptop and monitor set up for work.

Image source: Getty Images.

Another headwind that Axalta faces is simply the natural progression of driver behavior in larger markets all over the world. As larger markets become more developed, their car accident rates tend to consistently decline relative to the population, which would put pressure on the company's top-line growth in critical markets. Investors also should consider the behavior of global automakers broadly. Generally speaking, they're continuing to cut costs by consolidating their business among suppliers, giving the OEMs more leverage on pricing. It's already a common practice for OEMs to bring in multiple companies for a product, as a car often needs multiple coatings, to increase competition.

This company has a healthy business at the moment, and it has been around for over a century. However, the auto industry is poised to change more in the next two decades than it has over the past century, and businesses like Axalta will need to adapt or face a slow death from the shifts wrought by autonomous vehicles.

Turning into a winner?

Delphi Automotive ( DLPH ) gave investors a lesson in addition by subtraction this week after it announced it would be spinning off its powertrain business as a completely separate, publicly traded company -- a move that helped drive Delphi's stock more than 10% higher on the day it was announced.

In the press release regarding the plan, President and CEO Kevin Clark said:

As a result of our strategy to grow and expand through organic investments, acquisitions, and strategic partnerships aligned to the safe, green and connected industry megatrends, our Electrical/Electronic Architecture and Electronics & Safety businesses are well positioned for significant growth as the only global provider of an integrated "brain and nervous system" of the vehicle. We have the advanced technologies, engineering capabilities, and cost structure to be a global leader in the rapidly evolving mobility sector.

Graphic showing the amount of business being spun-off($4.5 billion revenue) from Delphi's total business($16.5 billion revenue).

Image source: Delphi Automotive's May 3, 2017, spin-off presentation.

While the powertrain business was a valuable one for Delphi, this spinoff will enable management of the remaining company to better focus on a future of driverless vehicles. This isn't a wildly new strategy for Delphi, either, as the company has been shedding its lower-margin segments for years. Since mid-2015, it has divested itself of its thermal, reception systems, and mechatronics businesses.

Once its powertrain business is spun off, it will leave a company focused on end-to-end solutions for smart mobility and autonomous driving. Delphi will focus on the "brains" of the vehicle, which will include active safety and autonomous systems, data and services, and infotainment systems; it'll also focus on the "nervous system," which includes power and signal distribution, sensing, and over-the-air (OTA) and vehicle connectivity.

With this spinoff, Delphi is going to increasingly become a popular investment for those looking to profit from the coming growth in autonomous vehicles and smart mobility. Management also estimates that between additional architecture, sensors, radar/lidar, and embedded controls and algorithms, as much as $5,000 content per vehicle could be added. That's a valuable chunk of a high-margin business, and Delphi seems poised to earn its fair share.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Delphi Technologies PLC Stock Quote
Delphi Technologies PLC
Axalta Coating Systems Ltd. Stock Quote
Axalta Coating Systems Ltd.
$30.12 (-0.66%) $0.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.