Vitesco Earnings: Solid Revenue Growth and Margin Improvement, Maintains Full-Year Guidance

Narrow-moat rated Vitesco VTSC reported second-quarter earnings per share before special items of EUR 1.15, EUR 0.07 better than the EUR 1.08 FactSet consensus and up EUR 0.73 from last year’s EUR 0.42 when the chip shortage was much worse. Due to less sporadic customer production from the chip crunch, the launch of new business, cost recoveries from customers, partially offset by non-core business wind-downs and continued supply chain disruption, consolidated revenue increased 13% to EUR 2.44 billion from EUR 2.17 billion a year ago, about EUR 14 million above consensus. Excluding favorable currency, organic revenue was 14% higher versus a 16% increase in global light vehicle production. However, core organic revenue, excluding wind-down businesses, increased 24%, outperforming the market by 8 percentage points.

Second-quarter adjusted EBIT was EUR 76.3 million for 3.1% margin compared to EUR 32.9 million with 1.5% margin a year ago. Margin was supported by volume operating leverage, and reduced electrification loss, partly offset by higher energy costs, increased launch costs, other inflationary cost pressures, and increased spending for future electrification programs. The result beat consensus by EUR 4.3 million or 7%. Despite improved adjusted EBIT, free cash flow was negative EUR 21 million, down from EUR 2 million last year due to higher capital spending and negative working capital.

Management’s 2023 guidance was unchanged with revenue at EUR 9.2 billion-EUR 9.7 billion, adjusted EBIT margin of 2.9%-3.4%, and free cash flow of around EUR 50 million. Due to uncertainties from industry headwinds, we model 2023 at EUR 9.45 billion in revenue, roughly midpoint of management guidance, but margin at 2.9%, the low end of management guidance. Due to the time value of money, we raised our fair value estimate by EUR 3 to EUR 113. The 4-star rated shares of Vitesco trade at an attractive 28% discount to our new fair value.