Ready or not, here they come. Driverless cars are the future, and they're likely to be here in some form more quickly than you think. It's a megatrend that automotive companies as well as technology companies are hoping to capitalize on, and it's an opportunity that could make savvy investors wealthy over the long haul. But with Intel's acquisition of Mobileye (NASDAQOTH:MBBYF), which was one of few pure plays into driverless-vehicle technology investors had at their disposal, is Delphi Automotive (NYSE:DLPH) the next best stock to own?
A long time coming
Even if you're knowledgeable about driverless-car stocks, you may be unfamiliar with Delphi Automotive, so here's a quick history lesson. Delphi is one of the largest automotive-parts suppliers in the world and was originally formed by General Motors (NYSE:GM) before it was spun off as an independent publicly held corporation, in the late 1990s. As a public company it struggled with the tough nature of the automotive-parts business and entered bankruptcy in 2005. But it re-emerged in 2009 and went public again in 2011. Since then, it's done quite well for investors.
Despite share-price gains in the past fie years, Delphi's management is clearly interested in getting away from lower-margin and capital-intensive businesses of old, and focusing on higher-margin electronics and driverless-vehicle technology. In fact, though it's been a long time coming, the company has made incredible progress adapting to the changing times and preparing for the upcoming driverless-car megatrend.
Why adapting matters
In May, when Delphi announced it would spin off its powertrain systems segment into a new and independent publicly traded company, it gave investors a glimpse into why adapting for a driverless-vehicle future makes sense on paper.
When you separate the electronics and safety (E&S) and electrical and electronic architecture (E/EA) segments -- the core Delphi businesses developing driverless-vehicle technology -- from its powertrain business, you can see the value in focusing on the former segments. The E&S and E/EA segments generated a combined $12 billion revenue in 2016 at 13.6% adjusted operating margin and 17.6% adjusted-EBITDA margin with $19 billion in bookings. On the flip side, the powertrain business generated only $4.5 billion in 2016 revenue at a lower 11.5% adjusted operating margin and 15.7% adjusted-EBITDA margin with a more modest $7 billion in bookings. Furthermore, E&S and E/EA have an estimated $100 billion addressable market, almost double powertrain's $55 billion addressable market.
Essentially, Delphi is setting itself up to be an end-to-end provider of smart-mobility and driverless technology.
CEO Kevin Clark outlined the company's vision in a press release:
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.
Delphi is leaner and meaner after years of divesting less lucrative businesses; the strategy is already bearing fruit with strong quarterly results. Delphi is clearly distancing itself from the traditional automotive business and is preparing for the future. For investors, Delphi offers the rare opportunity to buy into the driverless-vehicle megatrend that will unfold over the coming decades. While plenty of risks still remain in the cyclical and capital-intensive automotive industry, Delphi's road ahead looks far brighter than what we see in the rearview mirror.