Valeo’s Recent Share Price Weakness Could Be An Opportunity (OTCMKTS:VLEEF) (2024)

Introduction

Valeo (OTCPK:VLEEY) (OTCPK:VLEEF) is a French car parts manufacturers supplying car brands all over the world with a variety of original equipment and spare parts. As the total car production nosedived in 2020 (and is currently hit by the shortage of semiconductors), the share price has been under pressure, but this could actually be a good moment to start looking at Valeo again.

Source: Yahoo Finance

Valeo has its main listing on Euronext Paris where it’s trading with FR as ticker symbol. With an average daily volume of in excess of 1 million shares, the Paris listing is clearly the best option for investors. There currently are 242M shares outstanding, resulting in a market capitalization of just under 6.4B EUR.

While 2020 was a difficult year, Valeo performed very well in the second semester

Valeo is one of the world’s main suppliers of some very necessary pieces of equipment on a car: It's the leader in lighting systems, wiper systems, and power train systems. The company isn’t afraid to make tough choices, and 18 months ago, Valeo announced it would no longer invest in the top column module segment as it would be winding down its operations of that specific piece of equipment.

Source: annual report 2020

To maintain its existing number 1 and 2 positions in its core activities, Valeo spends a lot of money on R&D. About 7%-10% of its revenue is effectively spent on R&D efforts and despite the tough economic circ*mstances in 2020, Valeo spent almost 10% more on R&D than in the preceding year. This, in combination with a 3B EUR decrease in the top-line revenue which was not sufficiently mitigated by lower operating expenses, caused the operating income to be negative: Whereas Valeo reported an operating income of 1.03B EUR in 2019, the operating loss of 372M EUR in 2020 (and 857M EUR including the losses from equity-accounted companies) obviously put the company’s earnings under pressure.

Source: annual report 2020

The net loss in 2020 was approximately 1.98B EUR, but fortunately, the future looks much brighter. But before going over to the guidance for this year, I’d also like to note the cash flow result of the company was substantially better than the reported net loss as the net loss included impairment charges as well. As you can see below, the operating cash flow after taking the working capital changes into account was approximately 1.44B EUR. We should still deduct the net interest expenses of 75M EUR but add back about 60M EUR in taxes paid but not owed over FY2020, resulting in an adjusted operating cash flow of approximately 1.43B EUR.

Source: annual report 2020

While the total capex was just under 1.5B EUR, Valeo was indeed clearly free cash flow negative, to the tune of about 100M EUR if we include the distributions paid to non-controlling interests. That’s not great, but the negative free cash flow was just a fraction of the reported net loss, so the performance actually wasn’t as bad as one would think.

The company is off to a good start in 2021, and the guidance seems achievable

As Valeo only reports detailed financial results every six months, the quarterly updates are really just trading updates. Nonetheless, those updates do contain valuable information. The total revenue in the first quarter came in at just under 4.7B EUR, an increase of about 4% compared to the reported revenue in Q1 2020, but an 8% like for like increase.

Source: Q1 update

While the bar was set quite low when you compare any given quarter with the first quarter of 2020, it’s important to see the revenue was just about 1% lower on a like-for-like basis compared to Q1 2019 (and -3.6% on a reported basis).

Thanks to the relatively strong Q1 results, Valeo was able to confirm its full-year guidance. The company is aiming for a total revenue of 17.6-18.2B EUR (compared to just 16.2B EUR in FY2020) which should result in an EBITDA of about 2.35B EUR (the midpoint of the guidance) and a free cash flow result of 330-550M EUR (which is quite a big range so the working capital fluctuations may be the decisive factor here).

Source: Q1 update

As of the end of December, Valeo had a net debt of approximately 3B EUR, resulting in an enterprise value of approximately 9.4B EUR, which means the current EV/EBITDA ratio is just about 4. That’s relatively low, even for a cyclical business. Additionally, with a debt ratio of about 1.2 times the anticipated FY 2021 EBITDA, Valeo is actually in a good shape.

Investment thesis

I currently don’t have a position in Valeo, but just like I explained in my article on Faurecia (OTCPK:FURCF), my preferred approach would be to write some out of the money put options so I can collect the option premium while waiting for the share price to drop. And if the share price doesn’t decrease any further, then I at least make some money on the option premium. A P21 expiring in September for instance currently has an option premium of approximately 0.50 EUR which I think provides an excellent risk/reward ratio here.

I haven’t made a decision yet but rather than buying the stock outright, I will likely write some out of the money put options with various expiry dates and strike prices as the high volatility levels result in very attractive premiums.