Share of Visteon (VC 1.81%) have been on a tear in 2014, up nearly 25% YTD as the company has embarked on a large share repurchase program and engaged in several intelligent transactions. Though the automotive supply company's stock has risen substantially, shares still look attractive given management actions to increase per share value and a renewed focus on the company's higher margin, faster growing climate and electronics businesses.
$1 Billion Buyback
At the end of Q1, Visteon was still authorized to buyback another $875 million worth of stock until December 31st, 2015. As of March 31st, Visteon has bought back nearly 4 million shares at an average price of $83.33, good for more than 7% of the company. With shares currently hovering around $100, the Visteon can repurchase 8.75 million shares, or more than 18% of outstanding shares.
Additionally, the company entered into a $500 million accelerated share buyback (ASB) program during Q1 to take advantage of its cheap valuation; $375 million remained under the agreement at the end of Q1, and it's likely that Visteon repurchased a substantial amount of stock via the ASB in Q2, as 80% of the shares were expected to be received by the end of May. Though these buybacks would be substantially more accretive for shareholders if the stock price was cheaper, shares of Visteon still appear to be modestly undervalued.
Management is guiding for a midpoint of $680 million in EBITDA during FY2014-given an enterprise value of $3.82 billion, shares of Visteon trade at only 5.62 times 2014 EBITDA. This forecast does not include the company's acquisition of Johnson Control's electronics business, which will add about $60 million to annual EBITDA; the transaction cost Visteon $265 million. This acquisition, done at only 4.4 times EBITDA, the transaction will be accretive to earnings.
Visteon announced in May that it was selling the majority of its interiors business to an affiliate of Cerberus Capital Management. The unit generated annual revenues of roughly $1 billion. While the sale price was not disclosed, Visteon likely sold the business for .4-.5 times sales, or $450 million at the midpoint. While Visteon has to contribute $95 million to the sold business, the transaction will add an additional couple hundred million to the balance sheet and allow management to focus exclusively on the climate and electronic businesses. The aforementioned forecast includes the interior business operations, which accounted for around $100 million in EBITDA.
Overall, accounting for the effects of the recent transactions, Visteon probably trades at a little over 5 times 2014 adjusted EBITDA. Peers Delphi (DLPH +0.00%), Magna International (MGA 1.83%), and Denso (OTC: DNZOY) trade at 9, 7.25, and 5.6 times EBITDA, suggesting Visteon's valuation has room to expand.
Halla Visteon Climate Control (HVCC)
Now that the low margin interiors business has been divested, Visteon can allocate its capital expenditures on growth opportunities in its climate and electronics businesses.
From Q1 2014 to Q4 2015, Visteon expects to open up three new plants and expand on three existing ones for its HVCC business, in fast-growing auto regions such as Mexico, China, and Brazil. Management believes that these initiatives will drive 7% annual revenue growth in the climate business, while a shift away from the relatively expensive Korean manufacturing base to lower cost countries will drive adjusted EBITDA margins from 10.6% to 12%. Management projections for $6 billion in 2017 HVCC revenue on 12% margins result in annual segment EBITDA of $720 million.
HVCC is the #2 auto climate company in the world, and it appears to have significant competitive advantages in rapidly growing Asian and South American markets.
Electronics Business
Visteon's electronics segment grew 14.2% in 2013, and management is projecting double digit annual sales growth through 2017 before accounting for the Johnson Controls acquisition.
The segment is now the second or third largest player in cockpit electronics, and Visteon will gain a larger presence in infotainment, instrument cluster, body electronics, and display electronics. Management is also calling for $40 million in cost savings by 2017, which is expected to improve adjusted EBITDA margins to 10%.
If management can meets its forecasts, the segment should contribute roughly $200 in EBITDA at the end of 2017.
Bottom Line
At the end of 2017, Visteon expects to be generating about $920 million in annual EBITDA, a substantial jump from the $680 million that management is guiding for in 2014. With a strong growth forecast and a valuation at the low end of its peer group, shares of Visteon continue to look like a buy even after the run-up. With the company slated to buy back another 18% of the company, shares may rise rather quickly.
