Veoneer from Autoliv
Summary
(05 Jun 2018) Veoneer will likely be one of the best performers over the next decade. One of the largest companies in the active safety market, this company will likely have a market that doubles or triples over the next five years. As a tier 1 OEM, Veoneer will probably be one of the best companies to own for those interested in participating in the self-driving car market. An appropriate entry point for this company will likely increase overall returns over such a holding period.
Parent Ticker: ALV
Announced Record Date: 12 Jun 2018
Announced Distribution Date: 29 Jun 2018
Anticipated Ticker: VNE
Business
Veoneer (VNE) is the spinoff of Autoliv's (ALV) electronics business it will focus on the active safety devices market. Since 2013, the company has doubled in size and revenue through acquisitions and strategic partnerships. VNE should take advantage of the current market trends and technological developments in automated driving. The company estimates that they have approximately 11% of their 2017 market. They provide devices for some of the largest vehicle manufacturers in the world includeing Honda, Diamler, Hyundai/Kia, Ford and General Motors. The main driver to consistent returns for this company is the content it develops per vehicle and this is where the management team seems focused.
Parent Child comparison
The parent company, ALV, sells passive safety systems like seatbelts to its customers. VNE will sell electronics for active safety systems like automated braking all the way to autonomous driving. The growth portion of the business is in the spinoff with decent prospects for the next decade. ALV pays a dividend, VNE does not plan to pay a dividend.
Spin Ratio
1 share of VNE for every 1 share of ALV
Cash Flow
VNE does not provide a pro forma statement of cash flows. However, the company probably had a negative 9.1 million in operating cash flows last year (~.10/share). Past growth rates will likely push the company into positive cash flows from operations in 2018.
Cash Position
ALV will provide 1 Billion cash to VNE upon spinoff to create sufficient liquidity for the new company.
Revenue Projections
ALV will likely have about 2.4 Billion in revenues next year, with significant growth over the next decade
Management Actions
Management incentives do compensate the leadership team with equity compensation. As a percentage of overall compensation, the management team will receive roughly 50% of their compensation in equity benefits with vesting occurring over the next three years.
Activist Investor Activity
Activist investor activity appears unreported.
Peer Comparison
VNE competes with other members of the active safety electronics, most notably Aptiv PLC. As a direct competitor, VNE will likely perform similarly to Aptiv. These two companies will be the two largest companies in their industries and likely have nearly half of the market share for active safety devices. Other OEMs will likely lag behind the growth these two companies experience over the next 3-5 years. Their business is expected to grow by 2-3 times over that period. Placing VNE at Aptiv's price would indicate VNE to price somewhere between $79-94/share. Placing VNE somewhere in line with other OEMs would generate a price between $37-58/share. This latter price range would be an appropriate discounted price to purchase the company. At the lower end, the company trades at about 5-9 times gross profits. Aptiv trades just under 13 times profits, at that multiple VNE would be $79/share. Note that these calculations were necessary because the company still does not have positive earnings, making it a riskier investment.
Opinion
VNE will likely be on the cutting edge of the self driver car industry and will probably grow like a tech stock over the next decade. This company may be an extremely good purchase at less than $58/share. Purchasing the company at less than $79/share would likely be a good price for a long term holding. The company's business does have some risk associated with it (they are developing new technologies designed around safety, does anyone remember Takata's airbag issues?). However, the potential returns outweigh the possible risks in my opinion.