In yesterday's e-mail, I took a closer look at car-parts maker Versigent (VGNT), which spun out of Aptiv (APTV) earlier this year.
As I detailed, the company has a mixed financial picture. But the stock's valuation could hardly be lower at 6.3 times this year's estimates and 5.9 times next year's.
I concluded, "With a valuation that cheap, Versigent is definitely worth a deeper dive."
So that's what I'm doing today. First, let's take a closer look at the business...
Versigent makes "electrical architectures" for most major auto manufacturers worldwide – essentially, a car's nervous system.
Every car has a web of electrical pathways carrying two things: power and information. Versigent designs and builds the electrical architectures that do the carrying – like custom-built wiring harnesses, connectors, high-voltage cables, and charging hardware.
There are two halves to Versigent's business. Low-voltage architecture handles signals, power, and data – a car's everyday electrical traffic. High-voltage architecture handles the currents in electric and hybrid vehicles – think propulsion cables and charging-cord sets.
The company has 59 manufacturing facilities all over the world, with more than 95% of its manufacturing workforce in low-wage markets. You can see the breakdown in this slide from its March investor presentation:
Here's an overview of the company's financials from last year, before the spinoff:
At first glance, it appears to be a low-margin, highly competitive, cyclical business. It's easy to see why all of its previous owners wanted to get rid of it: First, General Motors (GM) spun it off as part of Delphi Automotive (which went bankrupt), then Delphi spun it off as part of Aptiv, and Aptiv spun it off as its own independent company.
But upon closer examination, Versigent is a better business than you might think...
The company has tremendous scale. Its wiring lives in 9 of the world's top 10 vehicle platforms, roughly 1 of every 3 battery-electric vehicles, and about 1 of every 6 vehicles produced worldwide.
The company serves more than 50 customers across 550 vehicle programs, launching more than 1,900 projects a year. It has around 8,000 engineers and roughly 700 patents.
Versigent has significant visibility into future revenues, as contracts are awarded several years before the start of production and typically last five to seven years. It's also protected from price fluctuations in copper (the primary commodity input) by pass-through provisions in its contracts.
The industry structure is also favorable: It's an oligopoly. Designing a wire harness that survives a decade of heat, vibration, and highway miles – then manufacturing billions of built-to-order combinations at 99.9% quality – is a genuinely difficult problem.
It's solved by only a handful of players globally. Three companies – Versigent and two Japanese firms, Sumitomo and Yazaki – account for roughly 70% of the total market.
A wire harness can be a commodity product – the customer develops a blueprint, then hires the cheapest bidder to build it. But Versigent's edge is designing the architecture itself using a proprietary software suite called iHarness. This sends customer-design data straight through to the factory floor and cuts drawing time roughly in half.
When you design the architecture, you get to "design out" cheap, commoditized content and "design in" the valuable content with pricing power. More than three-quarters of Versigent's revenue comes from architectures it helped create, not blueprints it merely executed.
Versigent also has a tailwind as the auto market increasingly shifts to hybrid and electric vehicles, which require more electrical architecture:
In summary, Versigent is a much better business than you might think – not a great one, to be sure, but a decent one.
Evidence of this emerged last month when the company reported second-quarter earnings (here's the press release and slide presentation)...
Revenues rose 11% (5% after adjusting for currency fluctuations and commodity pass-throughs), above long-term guidance of 3% to 4%.
Earnings before interest, taxes, depreciation, and amortization ("EBITDA") margins grew from 9.9% to 11.1% – a major step toward the company's long-term target of 12%. As a result, EBITDA grew 25%, though adjusted earnings and free cash flow ("FCF") were essentially flat.
Versigent reiterated its guidance of $200 million to $300 million of FCF this year and initiated a small dividend (its current yield is 1.1%). It also indicated that it might start buying back stock with its $250 million share-repurchase authorization.
So, how might this stock turn into a winning investment?
Looking forward, management's framework through 2028 is conservative:
- Adjusted revenue growth of 3% to 4% a year
- Margin expansion to about 12% as automation rises
- Annual net-income growth in the low teens
- Around $1 billion of cumulative FCF in 2026 through 2028
It's a solidly classic spinoff business plan: Compete in a tough industry, but use newfound independence to widen margins... use those improved profits to generate more cash... then use that cash for shareholders' benefit.
Versigent's market capitalization sits at around $3.3 billion today. Add net debt of $1.8 billion and you get an enterprise value ("EV") near $5.1 billion.
The company predicts it will generate adjusted EBITDA of $950 million to $1.03 billion this year. This means the stock trades today with an EV-to-EBITDA ratio of roughly 5.2 times.
And, as I noted earlier, its price-to-earnings ratio based on this year's estimates is only 6.3 times. Any way you look at it, the stock is super cheap.
If management hits its targets, EBITDA should expand to $1.2 billion in 2028. A more reasonable multiple, based on peer auto-parts suppliers, would be 7 times EBITDA. That implies a share price of $107 – a nearly 130% jump from yesterday's close.
I would characterize that as a base-case scenario: a mid-teens annual return, resulting in a double in three to five years. Of course, an economic downturn would affect the stock. But there's also an intriguing upside scenario...
Versigent sits in the physical connection layer for cars. What about expanding to serve new AI-enabled markets? For that, we're already seeing tantalizing hopes on the horizon...
The company has won an award to supply connectivity to Tesla Energy. And it's starting to gain traction in robotics, with customers in both the U.S. and China.
Right now, the market values Versigent solely as an auto-parts maker. In reality, it's an expert in car connectivity hardware that's starting to look more like data centers on wheels.
If investors start thinking of the company as part of the electrical-content complex, it could easily be worth 12 times EBITDA. Now we're talking about $180 to $200 per share – almost a five-bagger...
My team and I at Stansberry's Investment Advisory are taking a closer look at Versigent. If we decide to recommend it, as always, our subscribers will be the first to know. You can become one by clicking here.
Best regards,
Whitney
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