It’s been a volatile past year for the major market averages, with several bull traps laid by the market, placing a severe dent in the portfolios of investors that stumbled into these snares unexpectedly.
One of the areas where we’ve seen the most traps and damage occur is in the growth space, which is understandable given that many of these stocks were priced for perfection, and a combination of frothy valuations and higher rates is a recipe for a major reset in multiples.
However, one of the best ways to navigate this volatility is to find stocks that are managing to buck the trend we’ve seen of margin erosion and those that are trading in their own world with a low correlation to the market.
This means they’re less susceptible to short-term market corrections and volatility and are likely to continue to trend higher regardless of the market’s plans.
One example of this is Visteon Corporation (VC) which put together a 17% return last year despite the 19% decline in the S&P 500 (SPY).
Solid Buy-The-Dip Candidate
Visteon Corporation is a $4.2 billion company in the Auto-Truck and Original Equipment industry group and is a global automotive electronics supplier that was spun out from Ford (F) in 2000.
The company is unique in the group given that it is the only pure-play supplier of automotive cockpit electronics, the fastest-growth segment within the industry.
In fact, the segment is expected to grow from $36 billion to $60 billion in 2027, representing a ~9% compound annual growth rate in the period.
This is related to a higher proportion of vehicles being produced with advanced driver assistance systems [ADAS] plus digitization and connectivity.
Regarding Visteon’s growth, the company continues to be a powerhouse, reporting 14 consecutive quarters of outperformance vs. the market and sales of $1.03 billion in its most recent quarter, a 63% increase from the year-ago period.
This strong growth, combined with margin expansion related to higher sales volumes and the 2020 structuring actions (which began in 2020), translated to quarterly earnings per share of $1.58, representing 778% growth vs. the year-ago period.
Meanwhile, on a full-year basis, Visteon expects to report annual EPS of $5.51 in FY2022, a more than 450% increase from FY2020 levels ($0.97).
The company’s recent model launches include multi-display and digital clusters with the Nissan Serena, Hyundai/Kia SP2 platform, Mercedes EQS SUV, and the Cadillac Lyriq in China.
However, the company saw 32 new program launches last year alone and has picked up more than $1 billion in multi-display wins in the first nine months of 2022 alone.
These results are nothing short of exceptional and have strengthened Visteon’s balance sheet, with the company heading into the new year with a net cash position, strong free cash flow generation (Q3 2022: $59 million), and significant momentum after a busy year of major wins regarding new contracts.
Normally, I might be careful about owning a company after a year of triple-digit earnings growth.
Still, it’s worth noting that this earnings momentum is expected to carry into 2023, with annual EPS expected to grow another 35% to $7.41 despite lapping growth of 160% in FY2022 (current estimates).
This makes Visteon one of the highest-growth companies trading on the US Market.
Plus, the stock also benefits from having a relatively tight share float (~28 million shares), which is a key ingredient (in addition to triple-digit earnings growth) of the top-performing stocks over the past century.
So, with Visteon enjoying market share growth in the top-growing segment within the auto/truck equipment space, it looks like a solid buy-the-dip candidate.
The Fundamental Case
Visteon may look expensive to some investors unaware of the growth, with the stock now trading at ~27.2x FY2022 earnings estimates, a significant premium to many of its peers.
However, it’s worth noting that the highest-growth name in an industry typically trades at a large premium, and analysts expect Visteon to grow annual EPS to $7.42 in FY2023 and $10.05 in FY2024.
This would translate to nearly doubling its FY2022 annual EPS figure, which is why using stale figures like FY2022 earnings estimates could be a mistake.
In fact, Visteon could grow annual EPS to $12.00 by FY2025 if it continues to execute successfully, which would leave the stock trading at just 12.0x~ earnings, a dirt-cheap valuation for a company boasting a 30% plus compound annual EPS growth rate (2021-2025).
So, while the stock isn’t cheap based on FY2022 figures and will need to execute successfully, I am highly confident in this team’s ability to continue over-delivering on promises and see it as attractively valued relative to its long-term potential.
The Technical Picture
Moving to the technical picture, it’s hard to find a more attractive technical setup than Visteon, with the stock trying to break out of a 2-year base to new all-time highs and continuing to be in the top 5% of strongest stocks in the US Market.
This extreme relative strength combined with all-time highs is a potent combination, and from a bigger picture standpoint, this 2-year base breakout lines up with a 5-year base breakout, with the stock finally taking out its 2017 highs as well.
See the Full Technical Analysis Report for VC
While many breakouts in the market have been failing, these breakouts have been more failure-prone due to being in intermediate downtrends or being shorter bases which can result in choppier returns from the breakout point.
However, Visteon is an exception, with this being the third test of the $140.00 – $150.00 level for the stock, and triple tops in stocks being quite rare.
Hence, I see a high probability of this breakout being successful and see this brief pause in the stock at $150.00 as a buying opportunity.
The Bottom Line
Based on what I believe to be a fair earnings multiple for Visteon of 28 (7% below its 10-year average earnings multiple) to reflect its position as an industry leader and FY2023 annual EPS estimates of $7.42, I see a fair value for the stock of $207.80, translating to 38% upside from current levels.
So, while the stock may have outperformed its benchmark and the major market averages, I still see a significant upside for the stock over the next 18 months, and I would not be surprised to see a strong reaction when it reports earnings in late February.
Disclosure: I am long VC
The above analysis of Visteon Corporation (VC) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is Visteon Corporation (VC) A Buy or Sell?
Based on MarketClub’s technical analysis tools, Visteon Corporation (VC) is in a strong uptrend that is likely to continue. With short-term, intermediate, and long-term bullish momentum, VC continues to climb. Traders should protect gains and look for a change in score to suggest a slow down in momentum.
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