Forvia Earnings: Solid Organic Revenue Growth and Debt Reduction, UAW Strike to Effect Q4

No-moat-rated Forvia FRVIA reported third-quarter revenue of EUR 6.5 billion, just a hair above the FactSet consensus and down 1% on an as-reported basis. Excluding divestitures and currency effect, organic revenue increased 11%, up 7 percentage points above a 4% increase in global light vehicle production. Even though the microchip shortage remains, effects on customer production lessened as backlog ramped up during the quarter. Faurecia’s outperformance versus production was across the board in all operating segments and regions. The French auto parts vendor discloses only revenue in the first and third quarters, while financial statements are published for half- and full-year results.

Despite the UAW strike at its Detroit 3 customers, management maintained 2023 guidance with revenue of EUR 26.5 billion-EUR 27.5 billion and adjusted EBIT margin guidance of 5.2%-6.2%. We estimate about an $18 million revenue impact from the strike per week thus far in the fourth quarter, and management believes margin drop-through is roughly 20%. Due to uncertainties remaining from the UAW strike, output disruption (chips, logistics), war in Ukraine and Israel, and softening economic conditions in major auto markets, our unchanged 2023 estimated revenue is EUR 27.0 billion with an EBIT margin assumption of 5.2%.

The firm completed the EUR 1.0 billion asset divestiture program during the third quarter, as targeted for debt reduction by the end of 2023. The firm expects net debt/adjusted EBITDA to be 2.0-2.2 times by the end of 2023, down from 2.7 times at the end of 2022. Management now targets the divestiture of another EUR 1 billion in assets and expects to have less than a 1.5 times net debt/adjusted EBITDA ratio by the end of 2025. Due to the time value of money since our last update, we raised our fair value estimate to EUR 48 from EUR 47. The 5-star-rated shares of Forvia currently trade at a compelling 66% discount to our new fair value.