cleveland research company stock pitch competition finalist presentation
TRANSCRIPT
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1Cleveland Research Company Stock Pitch 2016
Michael Kress | Nicholas Meyerson | Nguyen Nguyen | Joseph Whiteside
NYSE:MBLY
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Overview & Thesis 3Industry Dynamics
Drivers & Growth Opportunities
Valuation
Final Thoughts
Appendix 1918
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Investment Thesis
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
Mobileye is a technological leader in the autonomous vehicle industry poised to capitalize on future regulations and increasing demand for autonomous features.
❖ The United States Department of Transportation and IIHS recently announced a plan to require automatic emergency braking systems on all new vehicles by 2022.
❖ Mobileye has a number of substantial OEM contracts with companies such as General Motors, Mitsubishi, Honda, Nissan, and is set to take advantage of the increase in demand for autonomous features.
❖ Mobileye has created a competitive advantage due to being first to market at supplying effective and proprietary vision based ADAS (advanced driver assistance systems).
We recommend Mobileye (NYSE:MBLY) as a Buy with a 12 month price target of $70.00, a 67% upside from the current share price.
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Company OverviewCompany Description
❖ Mobileye N.V. provides image sensing and processing technology for automotive applications
❖ The firm serves customers worldwide
❖ Corporate headquarters located in Jerusalem, Israel
❖ NYSE: MBLY
Company Outlook
Key Statistics Stock Performance
❖ Mobileye pioneered the use of mono-cameras to enhance Advanced Driver Assistance Systems (ADAS)
❖ The firm is continuing to revolutionize ADAS technology, adding features such as intelligent headlight control, lane departure warnings, and collision warnings
❖ 347 car models will integrate Mobileye’s EyeQ chips in 2016
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
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Management DirectionFuture Goals
❖ Attain full autonomous driving features while retaining the positives of the human element in vehicle operation
❖ Reduce human capital costs that arise from motor vehicle crashes
❖ Retain current contracts with large automobile manufacturers and Tier1 competitors to remain competitive
Technological Advancement
Strategies Usage Diversification
❖ The ability for ADAS systems to have 360 degree sensors, increasing performance and reducing the risk of collision
❖ Utilize radars and lidars in addition to mono-cameras in order to improve performance and progress further towards fully autonomous vehicles
❖ Use low bandwidth mapping technology for vehicles to integrate GPS technology into autonomous driving
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
❖ Using crowdsourcing to power mapping for autonomous driving, integrate low bandwidth processing (REM) into GM and Volkswagen vehicles
❖ Effectively neutralizes the somewhere/everywhere tradeoff (Google mapping uses 1gb/km, REM uses 10kb/km; 102x more efficient)
❖ Expansion of safety features and ADAS into construction and industrial vehicles
❖ ADAS systems pursued by insurance companies for improved driver risk analysis
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Industry OverviewCurrent Trends❖ Increasing regulations on fuel efficiency, influence on
cruise control technologies
❖ Consumer data availability due to the use of sensor technology
❖ Higher cost of technology in vehicles (~35%) due to increased demand for autonomous features
❖ Integration between telematics features and insurance companies to increase good driver incentives
ADAS Adoption
Market Share (based on market cap) Willingness to Repurchase
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
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Autonomous FeaturesIncreasing Affordability Effects
Tier1 Providers Tier2 Providers
❖ Autonomous features in vehicles open doors for many industries to increase revenues
❖ Mobile service providers, software firms, financial services, government
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
❖ Tier2 providers such as Mobileye supply the core intelligence that is used to integrate autonomous systems into vehicles
❖ Tier2 competitors: Hella, Busch Ltd, NVIDIA
❖ Barriers to entry: Mobileye has an advantage from secured future contracts, early entry (Mobileye systems have been in vehicles since 2007), and superior R&D
❖ Tier1 Providers are indirect competitors with Tier2 providers
❖ Some Tier1 and Tier2 manufacturers partner together for a collective benefit
❖ Tier2 manufacturers experience rapid increases in risk when market becomes competitive due to the nature of their business models
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DriversPowerful Technology
Capital Structure Sustaining Growth
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
❖ Mobileye’s Shield is the most effective ADAS camera system on the market, designed for large commercial vehicles
❖ Utilizes proprietary algorithms, software, and visual cameras to reduce risks of collisions
❖ Mobileye’s products are the flagship products of the industry, and through R&D, they stay in a competitive position
❖ Mobileye is debt free, as it does not carry short-term or long-term debt
❖ Bloomberg lists the likelihood of Mobileye’s default on liabilities as 0.02%
❖ Firm specific risk is higher than most (98.02%), but carries little to no risk of bankruptcy
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Sustaining GrowthLegal Tailwinds Future OEM Contracts & Launches
OEM AM
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
❖ United States Department of Transportation made agreement with 20+ automobile manufacturers
❖ All new vehicles mandated to have automated emergency braking by 2022
❖ AEB is highly dependent on effective ADAS systems
❖ EyeQ1, EyeQ2, EyeQ3 single camera systems are in development for launch later this year, each tier will have additional features
❖ 9 innovative new features total
❖ Contracted with Audi, BMW, Citroen, Ford, GM, & more
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Somewhere/Everywhere Tradeoff“Somewhere” “Everywhere”
Mobileye Solution Solution Launch
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
❖ “Somewhere” with full functionality, tradeoff is a large range of mapping
❖ Problem seen in Google and Baidu’s autonomous vehicle technology
❖ 3D detailed maps, inefficient bandwidth usage (1gb/km)
❖ “Everywhere” with partial functionality, tradeoff is quality of mapping
❖ Problem seen in general car industry
❖ Low-res (nav) maps u
❖ Roadside experience management (REM)
❖ Utilizes crowd-sourcing of real time data for precise localization
❖ Extremely efficient, utilizes only 10kb/km of driving
❖ Mobileye to launch REM in new Nissan vehicles in 2016
❖ Also working with Volkswagen and GM
❖ If crowd-sourced mapping is a success, Mobileye would gain a further competitive edge in terms of autonomous technology, and increasing future economic benefits.
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Supply ChainSuppliers
❖ Sunny Optical Technology Group, STMicroelectronics
❖ Strong relationship with suppliers; STMicroelectronics and Mobileye hit the 1,000,000th unit sold back in 2012
❖ Bloomberg reported very low levels of COGS (0.20%)
Future Products
Mobileye Customers Revenue & Gross Profit
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
❖ Audi, BMW, Citroen, Ford, GM, Honda, Hyundai, Jaguar, Nissan, Volvo are just a few of the major manufacturers that Mobileye is launching with
❖ Mobileye also services independent businesses on vehicle tracking to improve quality control and accountability
❖ EyeQ1
❖ Lane departure warning, intelligent headlight control
❖ EyeQ2 & EyeQ3
❖ Lane keeping and support, traffic sign recognition, forward collision warning, headway monitoring, fusion to radar, pedestrian detection warning, video only adaptive cruise control, low speed automatic braking
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InventoryRise of Inventory Against Sales Revenue Issues/Benefits of Rising Inventory
EyeQ Chip Growth Ratios
❖ Mobileye tends to update its technology relatively often, so if inventory is allowed to accumulate too high, there may be losses due to obsolescence
❖ With an increasing amount of contracts and increased consumer demand, a rising inventory will help Mobileye fulfill sales
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
❖ EyeQ Chip volume increased 83% year over year
❖ This increase in sales volume occurred despite an increase in average selling price
❖ Helped generate a $96 million free cash flow in 2015
❖ Return on assets: 9.58%
❖ Return on equity: 15.04%
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AMAftermarket Add-ons
❖ Mobileye sells individual mono-cameras that attach to dashboards for consumers
❖ Incorporates some of the features of the EyeQ (pedestrian collision warning, lane departure, forward collision warning, headway monitoring, intelligent high beam, speed limit indication)
Smartphone Integration
Mobileye 5-Series Growth
❖ 187 million people own a smartphone
❖ By integrating some of the features into smartphone apps, Mobileye is gaining an additional stream of revenue and possible sustained growth
❖ The firm can release features for sale through the app store, which results in a lower COGS and larger operating profits
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
❖ Aftermarket revenues are relatively small compared to OEM revenues, but growth can be sustained through finding new sales channels such as the smartphone market
❖ Utilizes a single camera
❖ Connects via Bluetooth to smartphones
❖ Enables consumers to experience benefits of Mobileye’s products without buying a new vehicle
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ProjectionsRevenues Meeting the Projections
Projected Revenues Projected Net Income
❖ If the automatic emergency braking regulation passes in the automotive industry, then its long term growth rate is realistic
❖ However, if a competitor rises and is on par with Mobileye, the growth rate is unrealistic as increased competition means that less of the industry growth will go to Mobileye
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
❖ Mobileye’s projections state that the managers believe that it will experience 40% and 47% growth rates in 2016 and 2017, respectively
❖ The firm also estimates its long term growth rate to be 15%, which is unusually high
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SWOT AnalysisStrengths Weaknesses
Opportunities Threats
❖ Competitors are partners; if they create quality ADAS systems themselves, Mobileye would lose revenue
❖ Doesn’t own a real barrier against other firms entering
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
❖ Debt-free capital structure❖ Flagship ADAS product❖ Contracts with large automobile companies❖ No current quality competition❖ Competitors are also partners
❖ Automatic Emergency Brake regulation in the future❖ Smartphone connectivity ❖ Crowdsourcing – mapping method
❖ Tier1 firms developing their own ADAS systems and not needing Mobileye anymore
❖ Competition arising as growth is too strong not to attract attention
❖ Fully autonomous vehicles by companies such as Google
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ValuationComparables Analysis Football Field Valuation
DCF (Perpetuity & Exit EBITDA Multiple) Sensitivity Analysis
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
❖ EV/EBITDA multiple used to derive an implied share price
❖ Implied share price ranged from $45.67 - $91.50 (17.1%-134.6% upside)
❖ WACC of 8.2% utilized
❖ Perpetuity growth assumed to be 3.5%
❖ EBITDA Exit Multiple calculated as 9.5x
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Valuation (cont.)Perpetuity Growth Method EBITDA Exit Multiple Method
Calculation of WACC Comparables Analysis
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
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Final Thoughts
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
Mobileye N.V. is a technological leader in the area of software algorithms and ADAS chip technology that is taking advantage of the rapidly growing usage of self-driving features in automobiles, and is positioned well for future growth due to future AEB regulations.
❖ Mobileye has a number of substantial OEM contracts with companies such as General Motors, Mitsubishi, Honda, Nissan, and is set to take advantage of the increase in demand for autonomous features.
❖ The United States Department of Transportation and IIHS recently announced a plan to make automatic emergency braking a standard on all new vehicles by 2022.
❖ Mobileye has a competitive advantage due to the quality of its product and R&D, and has the opportunity to increase revenues through many different markets, such as construction vehicles.
We recommend Mobileye as a Buy with a 12 month price target of $70.00, a 67% upside from the current share price.
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Appendix
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Income Statement
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
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Balance Sheet
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
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Statement of Cash Flows
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
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Discounted Cash Flow Analysis
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix
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Comparables Analysis
Overview & Thesis Industry Dynamics Drivers & Growth Opportunities
Valuation & Final Thoughts Appendix