Delphi: Navigating gains in auto accessories

This auto sector turnaround is attracting big bets from some top hedge funds.

By TheStockAdvisors May 9, 2013 12:05PM

Car on stack of money © Dynamic Graphics JupiterimagesBy Nicholas Vardy, Bull Market Alert


Delphi Automotive (DLPH) is one of the nation's largest automotive suppliers and a leader in integrated audio, video and navigation systems that keep the nation's drivers both informed and entertained while driving.


Delphi also makes collision warning systems now required by law on all new automobiles. Here's why Delphi's stock has been in a steady uptrend and why I believe it will continue rising in the months ahead.


First, the advanced safety features on U.S. automobiles aren't just high-end options any more. They are required by federal law.


Second, Delphi's prospects have improved along with the rebounding U.S. car market. This year, U.S. manufacturing industry sales of new cars and trucks will exceed 15.3 million, up from 14.4 million in 2012.


By 2015, sales of new cars and trucks will hit 16.4 million annually. And a lot of these cars will be equipped with Delphi-manufactured products.


Third, Delphi is a turnaround play that is just getting started. The company recently dumped much of its unprofitable European businesses. Although the company has to write off $300 million over the short term, the restructuring improves Delphi's longer-term outlook.


Delphi's revenues are projected to climb about 9% annually over the next few years, lifting sales to $22 billion by 2016 from $16 billion today. Earnings per share will expand even faster -- about 18% annually, or 95%, over the next 48 months.


That's also why Delphi's price-to-earnings to growth (PEG) ratio, which incorporates both the price-to-earnings multiple and analysts' consensus estimates of earnings growth is a mere 0.6, making the stock extremely attractive at current levels.


No wonder Delphi is attracting some big bets. Centerbridge Partners, a $1 billion-plus hedge fund, has bet an astonishing one-third of its portfolio on Delphi.


Billionaire Dan Loeb's Third Point had at least $50 million invested in Delphi at the end of December. John Paulson also owns 13.5 million shares.


The stock recently hit a new 52-week high on the heels of its earnings report. Revenue was $4 billion and in line with consensus estimates. But the $1.07 earnings per share number versus an analyst consensus of $0.95 earnings per share was much better than expected.


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