Investing.com -- Raymond (NSE:RYMD) James cut its rating on Aptiv (NYSE:APTV) shares to Market Perform from Outperform due to persistent challenges in the automotive industry and the potential impact of recent tariffs on the company's operations.
The firm also slashed its estimates for the stock well below the consensus.
Aptiv shares fell more than 5% in premarket trading Monday.
The stock has significantly underperformed compared to the broader market since its peak in early 2022, declining by 62% against a 27% increase in the S&P 500. Still, the company’s shares have shown resilience, and estimates have remained stable since the election.
However, Raymond James anticipates this trend may not continue over the upcoming quarters.
The analysts note that while the tax-free spin-off of Aptiv's Electrically Connected Business (EDC), announced on January 22, could eventually benefit shareholders, current industry trends and downward-biased estimates suggest the stock may be “range-bound in the near term,” pending the completion of the spin-off in late 2025.
The downgrade reflects concerns about Aptiv's significant clients, Volkswagen (ETR:VOWG_p) and Stellantis (NYSE:STLA), which contribute a mid-teens percentage of revenue and are seen as having substantial supply chain risks due to tariffs.
As a result, Raymond James has reduced its forecast for Aptiv's China operations by approximately $100 million, anticipating a faster decline in multinational and internal combustion engine vehicles in that market.
The investment bank has revised its 2025 projections for Aptiv's top line, EBITDA, and margins to $19.3 billion, $3.1 billion, and 15.8%, respectively. These figures are down from previous estimates of $20.2 billion, $3.2 billion, and 16.1% and are approximately 4% below the consensus estimates of $20 billion, $3.2 billion, and 15.8%.
The valuation of Aptiv's stock has de-rated along with its peers, trading at 9.3 times the firm's 2025 estimated earnings per share (AEPS) of $6.69 and 7.5 times EBITDA. This is a decline from its historical averages of 16.9 times earnings and 9.7 times EBITDA.
Although the stock appears inexpensive historically, it is currently trading at a premium compared to its peers, who are trading at 8.8 times earnings and 5.5 times EBITDA.
“We’ve seen estimates barely budge since the election and shares have appreciated ~12% since that time while the fundamental industry outlook has eroded in our view,” analysts led by Brian Gesuale wrote.
“Interestingly, the election has barely effected many auto/supply chain stocks making the case for the group to be washed out or an alternative view that complexity to unwind estimates was too much effort or that tariffs weren’t going to occur,” they added.
Aptiv has encountered more challenges in recent years compared to its early days as a public entity. The growth opportunity in China, which accounts for around 30% of auto production, appears to be permanently impaired, and global original equipment manufacturer (OEM) challenges have slowed the adoption of electric vehicle and autonomous driving technologies.
According to the analysts, these factors have historically been the driving force behind disruptive auto suppliers and justified higher EBITDA multiples, but such optimism seems to be fading.