CAR Management Briefing Seminars “Rewired For Success: Is ... · • Outsourcing opportunity for Suppliers ... • Data is Gold –What is the pick axe? • Industry unit volume

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CAR Management Briefing Seminars

“Rewired For Success: Is the Industry Sustainable for Capital

Creation?”August 2017

Matthew T. Stover

617.624.7353 | [email protected]

Brendon E. Mason


Andrew J. Crespo


“Rewired For Success: Is the Industry Sustainable for Capital Creation?”

mailto:[email protected]




2

Section I. So much has changed (industry structure) but so much remains the

same (cycle, margins & valuation).

Section II. CAR.x is upon us. In aggregate terms, the inflection point has been neutral…but at

the stock level it has been a massive differentiator.

Section III. Parting thoughts from an investor – this seems an important time to balance

risk vs reward.

Today’s Agenda


The market is a Discounting Mechanism that Balances Across Three Axes

3

EFFORT

CAPITAL TIME

Returns

Growth

Valuation

Predictability

Source: SFG Research


We Think The Auto’s Are Getting Punished For Lack Of Predictability

4

Source: SFG Research, FactSet

6.0x

7.0x

8.0x

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

2 4 6 8 10 12 14

EV

/EB

ITD

A

ROIC %

Financials

Telecom

AUTOMOTIVE

Materials

Healthcare

Industrials

ConsumerDiscretionary

ConsumerStaples

Tech

Utilities


Despite Volume Growth and Shift East, Cyclical Concerns Loom

5

Source: SFG Research, AutoForecast Solutions LLC

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

2002 2007 2017

Un

its

, Millio

n

APAC Eurozone NA SA


In China, Investors Don’t Know What to Make of the Cycle…

6

Source: SFG Research, AutoForecast Solutions, LLC

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

China Production 2005-2020e

Source: SFG Research, AutoForecast Solutions, LLC

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

1 4 7

10

13

16

19

22

25

28

31

34

37

40

43

46

49

52

55

58

61

64

67

70

73

76

79

82

China 2016 Production by OE


Unfortunately, In The Key NA Market The Market Has Strong Opinions…

7

Source: SFG Research, Ward's Automotive

6

8

10

12

14

16

18

20

196

3

196

5

196

7

196

9

197

1

197

3

197

5

197

7

197

9

198

1

198

3

198

5

198

7

198

9

199

1

199

3

199

5

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

201

7

mil.

un

its

VolkerMoment

Source: SFG Research

8?

-10

-8

-6

-4

-2

0

2

4

6

8

10

Du

rati

on

-Y

ea

rs

???

UPTURN

DOWNTURN


OEM Margins Have “Peaked”…

8


-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

197

4

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

Ford: Operating Margin - Auto


-20%

-15%

-10%

-5%

0%

5%

10%

15%

197

4

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

GM: Operating Margin - Auto


…and so, too, have the Supplier Margins.

9

Source: SFG Research, Company Reports, FactSet

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%Supplier EBITDA %

US '01-'16 EU '01-'16 JN '01-'16


Bottom Line…Market Sees Auto’s Through Historical Valuation

Crucible…Not Likely to Change Until a Recession

10


0%

20%

40%

60%

80%

100%

120%

Pre-Tech Bubble Pre-Crisis Current

Rela

tive

Va

lua

tio

n to

SP

50

0 %

Growth Value OEM


11



Section II. CAR.x is upon us. In aggregate terms, the inflection point has been

neutral…but at the stock level it has been a massive differentiator.


risk vs reward.

Today’s Agenda


CAR.x Is the Big Question Hanging Over the Future Outlook for Auto

12

Autonomy/Technology

TaaS/Behavioral

Electrification/Regulatory


Remember Amara’s Law When Opining On Future…

• “We tend to overestimate the

effect of technology in the short

run and underestimate the effect

in the long run”

-Roy Amara

13


The Market is Favoring Stock’s Leveraged to CAR.x

14


-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

MB

LY

TS

LA

VC

DLP

H

FC

AU

DA

N

BW

A

TE

L

ST

LE

A

AD

NT

SP

50

MG

A

SH

LO

TH

RM

GM

SM

P

CP

S

AL

V

CT

B F

TE

N

TO

WR

GN

TX

AX

L

SU

PSto

ck P

rice Y

TD

Retu

rn


Investors & Executives Ask if it Has Gone Too Far?

15

Source: SFG Research, Factset

$-

$20

$40

$60

$80

$100

$120

Enterprise Value ($ bil.)

ContendersRegionalChamps


Maybe we need to change our perspective……

16

Source: SFG Research, Factset

$-

$200

$400

$600

$800

$1,000

$1,200

1 2

Enterprise Value ($ bil.)

TeslaOEM/Supplier


Autonomy: Investor Perception Positive

Current View

• Inevitable

• Vehicle Autonomy vs Autonomous

Vehicles?

• Suppliers: Content opportunity

• OEM’s: Revenue opportunity

• Non-Auto Players hunting for their

position

17

How could we be wrong?

• Non-Auto player could be the disruptor

• Delayed timing

– Regulatory delays

– Infrastructure build out

• Regulatory demand creates adverse

pricing environment


Electrification: Investor Perception Negative

Current View

• Growing Sense of Inevitability

• Fixed / Variable cost pressure

• Disruption of Current Industry Order –

By Company (TSLA) or Government

(China)

• Labor Risk

18

How could that “View” be wrong?

• Commonization

• Outsourcing opportunity for Suppliers

• Long term opportunity to improve

capital returns for OEM’s


TaaS (Transportation as a Service): Investor Perception Confused

Current View

• Inevitable

• Everyone wants to be a player:

– OEM, Supplier, Dealer & Rental,

– Tech, Government

• Data is Gold – What is the pick axe?

• Industry unit volume production will

decline but $ value likely to go higher

19

How could we be wrong?

• Heterogeneity of market could lead to

slower than anticipate adoption curve

• Business Models are Complex

• Slower than anticipated adoption curve

– some fundamental problems have not

been addressed


20



Section II. CAR.x is upon us. In aggregate terms, the inflection point has been neutral…but at

the stock level it has been a massive differentiator.


risk vs reward.

Today’s Agenda


Investment Rates are Climbing – Articulate the Magnitude of Growth

Spending…The Market Can Look Forward.

21

OEMs Suppliers


2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

CEX % RDE %

Source: SFG Research, Company Documents

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

CEX % RDE %


If Stable Cycle Prevails, Growth Investment Can Be Funded

22


-2.0x

-1.0x

0.0x

1.0x

2.0x

3.0x

4.0x

AX

L

ST

TO

WR

AD

NT

DA

N

TE

N

TE

L

BW

A

DLP

H

CP

S

MG

A

LE

A

AL

V

TH

RM

SU

P

GN

TX

VC

Net Debt/EBITDA


0%

5%

10%

15%

20%

25%

30%

35%

40%

GN

TX

ST

TE

L

AX

L

DLP

H

BW

A

TH

RM

SU

P

AL

V

VC

CP

S

DA

N

LE

A

MG

A

TE

N

TO

WR

AD

NT

EB

ITD

A %

FCF% = EBITDA % - CEX %

FCF % CEX %


Think Through the Downside and Please Don’t Bet the Ranch Chasing

Unicorns…Consider Adoption of a PE Approach

23


0

50

100

150

200

250

300

350

400

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

YT

D

201

7P

F

Number of Transactions


-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

YT

D

201

7P

F

Transaction Value ($ mil)


Closing Thoughts

• The industry cycle is shifting and the market sees the industry through a

historic valuation crucible.

• CAR.x is complex and will take time

• Manage capital with respect to risk…not just reward

• Industry may want to adopt PE model to access liquidity and manage

risk.

THANK YOU VERY MUCH

24


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