UPDATE: Morgan Stanley Cuts Delphi (DLPH) to 'Underweight' on Risk from Move to Electrification
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(Updated - November 29, 2016 10:21 AM EST)
Morgan Stanley downgraded Delphi Automotive PLC (NYSE: DLPH) from Overweight to Underweight with a price target of $59.00 (from $74.00). Analyst Adam Jonas sees risk to top-line growth and profitability due to a shift to electric vehicles, along with lower margins for ICE powertrain, greater up-front RD&E costs, and hungry new competitors.
Jonas explained, "We believe investors must pay close attention to the challenges facing OEMs as they confront unprecedented pressures to completely reengineer the propulsion system from internal combustion to electric. Roughly 25% of Delphi's global profit comes from its powertrain division, a collection of businesses that optimize the combustion of diesel and gasoline through highly engineered pumps, injection systems, fuel delivery, exhaust flow, emission canisters, throttle controls, and sophisticated control modules. We're not suggesting these products will be replaced immediately, but we do see scope for diminished economic returns given changing OEM priorities that create material risk to the company's earnings trajectory."
"A major move away from internal combustion technology is not something we believe OEMs and its supply base can easily cope with," continued the analyst.
"Eroding ICE content can lead to lower growth and margin pressure. A significant number of new business wins in the areas of electrification may be possible, but require higher-for-longer engineering and launch costs that we do not believe are in consensus expectations yet. We take a more conservative stance on such costs given the unprecedented nature of many of these programs and the risk factors that could impact OEMs that are outside of DLPH's control. Our caution on internal combustion powertrain is not limited to Delphi; it is also reflected in our UW rating on BWA and our EU team's recent downgrade of Continental to EW," Jonas added.
Shares of Delphi Automotive PLC closed at $66.32 yesterday.
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