Shares of Delphi Automotive (NYSE:DLPH) -- a name often skipped over when discussing automotive plays -- are up roughly 8% in 2014. This is despite the stock's recent slide of almost 10%.
Some of the best gifts in the stock market often come in the form of losses. In other words, when quality stocks with low valuations and growing earnings become cheaper, it offers attractive buying opportunities for long-term investors.
The basics: Revenue and earnings per share
First, let's look at Delphi's earnings per share and revenue situation. The auto parts manufacturer shows impressive earnings growth and decent sales growth in recent years:
Sales have steadily increased by about 5.5% to 6% over the past two years. But analysts expect Delphi to grow sales 8.4% in fiscal 2015. Earnings per share have grown about 16% annually, and analysts expect earnings to grow 14.7% next year.
Those are some strong numbers, and reason for a bullish outlook. But there's something else that comes out of this that inspires even more bullishness: valuation.
Valuation is attractive
Having double-digit EPS growth and mid-single-digit sales growth is pretty good on its own. But companies with those attributes can trade at a high premium, sometimes even above the broader market's valuation.
Delphi, though, does not trade with a rich valuation. Instead, its price-to-earnings ratio -- or P/E, which shows how much investors are willing to pay for a company's earnings -- of 15.8 is at a discount to the auto parts industry, consumer cyclical sector, and S&P 500, which have trailing-12-month P/Es of 17.7, 23.6, and 18.7, respectively. Delphi also has a forward 12-month P/E of just 11.8, despite earnings that are forecast to grow nearly 15% next year. That's pretty cheap in most investors' opinions.
Sticking with earnings growth, a helpful measure is the PEG ratio. The PEG ratio basically measures the P/E against how fast earnings are growing. Generally, a reading below 1 represents an undervalued company, a reading of 1 represents a fairly valued company, and a reading over 1 suggests the security is overvalued.
Delphi's five-year PEG ratio stands at just 0.85, indicating the stock is indeed somewhat undervalued based on its earnings growth and current price.
No stock is perfect
While Delphi has impressive earnings and revenue growth and an attractive valuation, there are some concerns. The company's balance sheet isn't the strongest or most pristine found on Wall Street.
The company's long-term debt has increased from $71 million in 2010 to $2.42 billion as of the most recent reported quarter. And total liabilities have grown 53% since 2010, from $5.44 billion to $8.32 billion. Meanwhile, total assets have risen only 3.3%, from $11.1 billion in 2010 to $15.1 billion in the most recent quarter.
Of course, debt on the books doesn't automatically make this stock a no-touch for investors. In January, Delphi announced that it would repurchase $1 billion worth of stock, and the company also pays a 1.5% dividend yield. This obviously puts pressure on the balance sheet, since Delphi does not have the net income to pay a dividend, buy back stock, run the business, and keep enough cash lying around for emergencies, so financing is definitely necessary.
Delphi won't go bankrupt tomorrow because of an ultra-levered balance sheet; it's just something for investors to be aware of. For instance, the company's "current ratio," or current assets divided by current liabilities, comes in at a healthy 1.52. It's usually good to see this ratio between 1.5 and 2.
This essentially means that for every $2 in current liabilities, Delphi has $3 in current assets. If there is a short-term liquidity problem or some other issue, the company can continue to pay its bills. A measurement under 1 is dangerous, as the company might have issues meeting its short-term costs and obligations. Over 2 and the company might have too much money lying around that could be better applied somewhere else.
The balance sheet isn't horrendous by any means, but investors should be aware of the potential risk in the event of a huge economic slowdown. Overall, the company has strong sales and earnings growth, operates in the continually growing auto industry, and has a low valuation. For these reasons, long-term shareholders should feel comfortable adding to their stake on this recent pullback.
Editor's note: A previous version of this article listed Delphi's total assets as $1.11 billion in 2010 and $1.15 billion currently, instead of $11.1 billion and $15.1 billion. The Fool regrets the error.
Bret Kenwell has no position in any stocks mentioned. The Motley Fool recommends BMW and Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.