We believe that insiders have the greatest insight into the fundamental health of a company, and so we follow closely insider transactions. It has been shown that insiders tend to outperform the market by as much as 7% annually (read more about how this strategy can boost your returns).
In a recent Form 4 filing with the SEC, four directors were selling off shares of Delphi Automotive PLC (NYSE:DLPH). These four directors – Nicholas Donofrio, Gary Cowger, Bernd Wiedemann, and John Krol – sold off over 87,000 shares in the range of $33.75-$34.10. Krol was the biggest seller, dumping over 50,000 shares – 33% of his shares.
Insider selling in Delphi shares has been robust in 2012, and includes big cuts by its largest shareholders, billionaires John Paulson and Paul Singer. Paulson sold off 29% (2Q) followed by 22% (3Q) over the past two quarters. Billionaire Paul Singer – founder of Elliott Management – dumped 18% of his shares in 2Q and then 17% in 3Q (check out Paul Singer’s latest market moves). Other notable large insider trades include four insiders that have sold off 100,000 collectively through the month of November.
Delphi is already up 60% year to date, but still only trades at 9x earnings. This is below some of its top peers, including Johnson Controls (16x) and Visteon (76x). Delphi’s 3Q results came in at $0.84 versus $0.72 from the same quarter last year and well above consensus of $0.73. Despite this recent success and a relatively low P/E, 4Q guidance was lowered on weak European production expectations – estimates predict a 15% declination year over year. EPS is now expected to be in the range of $0.79-0.89 versus previous consensus of $0.99. Delphi also expects to have to spent $250 million for restructuring, with part going to help integrate its recent acquisition of FCI Group’s motorized vehicles division (MVL).
Johnson Controls, Inc. (NYSE:JCI), Visteon Corporation (NYSE:VC), Lear Corporation (NYSE:LEA) and Autoliv Inc. (NYSE:ALV) are some of Delphi’s closest peers. Johnson Controls is the largest of our five auto parts companies with an $18 billion market cap, but it is also down over 10% year to date. Johnson’s dividend yield of 2.7% and solid growth makes it a generally attractive investment, and on the back of increasing auto sales, Johnson expects to grow revenues by 4.6% in 2013.
Visteon is an auto parts company that trades at an outsized earnings multiple (76x), but investors are banking on management unlocking shareholder value with a breakup of the company. Even with a high trailing P/E, investors can still find value in the company where it only trades at 13x forward earnings. Visteon has billionaire Steven Cohen as one of its top investors in 3Q (check out Steven Cohen’s newest stock picks).
Lear recently posted 3Q EPS results of $1.29 versus $1.08 from the same quarter last year, and above estimates of $1.21 a share. Lear trades at only 9x earnings and should see future growth driven by strong U.S. and Asia auto sales. Lear had billionaires Steve Cohen and Ken Griffin upping their stakes during 3Q.
Last but certainly not least, Autoliv trades at an attractive P/E at 11x and pays a solid dividend that yields 3.3%, but we believe it could be a value trap. Even with a beta of 2.0, Autoliv is only up 13% year to date. The biggest worry, though, is future growth, as this automaker expects to only grow EPS at 2% annually for the next five years.
To recap: the reasoning behind the recent Delphi insider selloff may be twofold. Firstly, the fact that shares are up substantially since its emergence from bankruptcy could indicate that profit taking is in order. Otherwise, bearish insider activity may tell investors that a turnaround – and additional growth – will take longer than expected.
