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Delphi Technologies Banks on Product Portfolio Amid Debt Woes

Zacks Equity Research
Nielsen Holdings (NLSN) reports better-than-expected earnings in the first quarter, driven by solid execution and ongoing focus on operational efficiency.

Delphi Technologies PLC DLPH is benefiting from vast global network and innovative product portfolio.

Recently, the company reported mixed fourth-quarter 2018 results wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. Adjusted earnings per share of $1.06 beat the consensus mark by 18 cents and declined on a year-over-year basis. Revenues of $1.17 billion missed the consensus estimate by $3.7 million and decreased 9.2% year over year on a reported basis and 5% on an adjusted basis (adjustments were made for currency exchange and certain aftermarket original equipment service revenue retained by the former parent).

Delphi Technologies has an impressive earnings surprise history, having outpaced estimates in three of the trailing four quarters. It delivered average four-quarter beat of 8.6%.

What’s Driving Delphi Technologies?

Delphi Technologies has a geographically diverse revenue base. Region-wise, it derived 44% of revenues from Europe, 28% from North America, 25% from the Asia Pacific and 3% from South America in 2018.

Adjusted revenues increased 16% in South America, 6% in North America and 3% in Europe. While growth in Commercial Vehicle and GDi drive revenues from Europe, the same from North America is benefiting from program launches and increased sales to Commercial Vehicle customers.

Regional presence coupled with its diversified and innovative product portfolio with updated technologies makes Delphi Technologies a solid choice for original equipment manufacturers (OEMs). This is because OEMs are focused on increasing efficiency and expanding their global manufacturing footprint by choosing suppliers with global scale, who can easily adapt to regional variations. In 2018, within the Powertrain Systems segment, 72% of net sales came from light vehicle OEM customers and 28% from commercial vehicle OEM customers.

Furthermore, the company’s aftermarket business continues to generate stable recurring revenues. Also, Delphi Technologies witnessed robust growth across its two portfolios — Power Electronics and Commercial Vehicle Systems — which grew approximately 30% and 25%, respectively, in fourth-quarter 2018.

Risks

Delphi Technologies has a highly leveraged balance sheet. As of Dec 31, 2018, long-term debt was $1.49 billion, while cash and cash equivalents were $359 million. Such a cash position implies that the company needs to generate adequate amount of operating cash flow to service its debt. Also, high debt may limit the company’s future expansion and worsen its risk profile.

Declining revenues in passenger car diesel and GDi continue to weigh on Delphi Technologies’ top line. Global presence exposes it to foreign currency exchange rate fluctuations. The company’s business also gets affected by seasonal factors.

Zacks Rank and Key Picks

Currently, Delphi Technologies has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Zacks Business Services sector are Interpublic IPG, Omnicom OMC and Paychex PAYX, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term expected EPS (three to five years) growth rate for Interpublic, Omnicom and Paychex is 2.7%, 4.7% and 8.8%, respectively.

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