20% Downside For Aptiv Stock?

Aptiv PLC stock (NYSE: APTV) is up just 4% since the beginning of this year, but at the current price of around $98 per share, we believe that Aptiv stock has 20% potential downside.

Why is that? Our belief stems from the fact that Aptiv stock is still up over 60% from the low seen at the end of 2018, almost 2 years ago. Further, after posting weak Q2 2020 numbers, and with industrial demand still not up to pre-Covid levels, we believe Aptiv’s stock could drift lower. Our dashboard What Factors Drove 62% Change In Aptiv PLC Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Aptiv stock’s rise since late 2018 came despite roughly unchanged revenues, which translated into a 9% drop in net income, due to rising operating expenses. This, combined with a 3% decrease in the outstanding share count, led to a 5% drop in earnings on a per share basis (EPS).

In addition, Aptiv’s P/E ratio rose from 15x in 2018 to 25x in 2019, and has further risen to 25.5x currently. However, given the drop in demand and the volatility of the current situation, there is possible downside risk for Aptiv’s multiple, especially when compared with previous years: P/E of 16.5x at the end of 2017 and 15x as recently as 2018.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus and the resulting lockdowns have hampered demand for electrical products across a variety of industries. Aptiv, an electronic connector manufacturer, which caters to multiple industries, has seen a sharp drop in demand for its products. This is evident from Aptiv’s Q2 2020 earnings, where revenue came in at $1.96 billion, down from $3.63 billion for the same period in 2019. Operating margins came in at -15.9%, down significantly from 9.2% a year ago, as expenses rose across all operating heads. Earnings on a per share basis, dropped from $1.07 to -$1.43.

Despite the economy opening up, it’s likely that demand for Aptiv’s electronic products won’t jump back to pre-Covid levels immediately, which means revenue and margins will suffer in the medium term.

Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/E multiple decline from the current level of 25.5x to around 21x (the average of current P/E and 2017 P/E), which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $80.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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