Vitesco Q4 Results Improve on Less Chip Disruption

Narrow-moat-rated Vitesco VTSC reported fourth-quarter earnings per share before special items of EUR 2.29, well above the EUR 1.45 FactSet consensus EPS and EUR 0.66 higher than last year’s EUR 1.63 EPS. Due to less-sporadic customer production from the chip crunch, consolidated revenue jumped 15% to EUR 2.3 billion from EUR 2.0 billion last year but was 2% lower than consensus. Excluding favorable currency, organic revenue rose 10% versus a 12% increase in global light vehicle production. However, core organic revenue, excluding wind-down business lines, increased 15%, outperforming the market as the fourth quarter last year was hit harder by the chip crunch.

Fourth-quarter adjusted EBIT more than doubled to EUR 96.9 million for 4.1% margin compared with EUR 41.6 million with 2.0% margin a year ago. Even so, margin was negatively affected by customer call-offs, COVID-19 in China, higher energy costs, and other inflationary cost pressures, partially offset by cost recovery from customers. The result beat consensus by EUR 3.1 million or 3%. Due to the higher adjusted EBIT, partially offset by higher capital spending, and negative working capital, free cash flow increased to EUR 90 million from EUR 21 million last year.

Management’s 2023 guidance has revenue at EUR 9.2 billion-EUR 9.7 billion, up from EUR 9.1 billion reported for the full year 2022. Adjusted EBIT margin is expected to be 2.9%-3.4%, up from 2022′s margin of 2.5%. However, due to higher capital spending, free cash flow guidance was around EUR 50 million, down from EUR 123 million in 2022. Due to uncertainties from industry headwinds, we model 2023 with EUR 9.4 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 since our last update, we raised our fair value estimate to EUR 109 from EUR 104. The 4-star-rated shares of Vitesco trade at an attractive 44% discount to our new fair value estimate.