Between 2015-19, APTV was valued at 8.5x on an EV/EBITDA basis, a 40% premium to the Supplier Comp Group average. We believe positive revisions to industry volume assumptions and earnings along with the planned spinoff of the EDS business will result in a re-rating of APTV to pre-Covid multiple levels. We are initiating coverage on APTV with a Buy rating and a $109 price target. Our target applies the midpoint of our valuation range, or 9.0x on an EV/EBITDA basis and 12.0x on a P/E basis, averaging both metrics applied to our 2025 and 2026 assumptions, with additional upside when the spinoff is completed.

The auto industry is capital-intensive, labor-intensive, cyclical, low-growth, competitive, and highly regulated. While industry characteristics limit competitive threats, each presents an added financial risk. Industry demand in the major global markets depends on current economic conditions, which can change unexpectedly and could have a material impact on our earnings assumptions as well as our target price. The high relative fixed cost structure of the industry can lead to material changes in pricing for new and used vehicles as well as components. A material decline in the price structure of the industry could also have a material impact on our financial assumptions. During periods of severe industry recession in the past, many companies in the auto sector were forced to seek bankruptcy protection.

If the impact on Aptiv from any of these factors above proves to be less than we anticipate, the stock could materially outperform our target. Conversely, if the impact on the company from any of these factors proves to be greater than we anticipate, the stock could underperform our target price.