This Spin-Off Could Make Investors Huge Winners

Key Points

• The company that started as a part of General Motors has had multiple spin-offs.

• The spin-off should unlock a higher valuation for its higher-growth business.

• The spin-off should be completed during the first quarter of 2026.

• 10 stocks we like better than Aptiv ›

Sometimes you have to break things down to build them back up better. Aptiv (NYSE: APTV) has announced this year that the company would essentially be doing that and breaking the company apart. Oftentimes investors think of creating value through acquisitions or the creation of new brands, but that's not the only way companies can shake things up and create value. Let's dive into what Aptiv's spin-off means for its future and what it means for investors. Hint: It's good news!

Image source: Aptiv.

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What's going on?

Aptiv may not be a household name for investors, but it's a prominent player in the automobile components industry with a focus in electrical systems, advanced driver assistance systems (ADAS), and connected vehicle solutions. We actually have to rewind the clock to understand the company's origin story because this isn't the first time it has had a significant strategic shift and spin-off.

The company started its story as Delphi Automotive, an auto parts business spun out of General Motors in 1999 before it filed for bankruptcy in 2005. The company then restructured and spun off Aptiv in 2017 with Delphi keeping powertrain technologies, sensors, valve actuators, among others, and Aptiv taking the higher-growth businesses such as vehicle electrification and safety.

The move looked brilliant at first because Aptiv was rewarded with a higher price-to-earnings ratio due to the hype surrounding electrification of vehicles. However, when that electric vehicle (EV) hype slowed, the company's price-to-earnings ratio spiraled lower to match more traditional auto-parts suppliers.

The problem wasn't Aptiv's business, because it was consistently growing earnings and improving margins, as you can see in the graph below. Aptiv's consistently improving bottom line is also why this investment shouldn't turn into a value trap. In fact, Aptiv is estimated to earn nearly $7.50 per share this year, per FactSet, up from $2.61 in 2021, which is a solid compound annual growth rate of 30%.

APTV PE Ratio (Forward) data by YCharts

Rather, the problem was perception of the stock being too intertwined with the automotive industry -- some of its competitors have diversified far outside the fickle auto industry. That perception drove its price-to-earnings valuation lower.

Round two

If at first you don't succeed, try, try again -- so here we are for round two. In another attempt to shift perception of its business, Aptiv announced it would split into two companies. One company will contain its slower-growth electrical distribution systems (EDS) business, and the second company will focus on the faster-growing safety and software.

In theory, once the spin-off wraps up in the first quarter of 2026, it should enable both new companies to better allocate capital to growth and reward the new higher-growth company to obtain a higher valuation than traditional auto parts suppliers. That's how investors win.

For more context, here's a breakdown of how the two companies and their businesses looked last year. In 2024 the EDS business generated annual sales of $8.3 billion with profit margins checking in at 9.5% EBITDA. On the flip side, safety and software generated 2024 sales of $12.2 billion with EBITDA margins almost double EDS, at 18.8%. But what many investors are overlooking is that safety and software are businesses that can easily reach outside the automotive industry and decouple the company, at least in theory, from its lower auto parts supplier valuation.

What it all means

It's not difficult to see why the businesses should be separated, especially considering the perception and its historic ties to the automotive industry. Delphi's original breakup was an attempt to evolve into a better auto parts supplier, but this spin-off is about focusing on a wider addressable market generating more sales at higher margins.

In fact, Aptiv already acquired communications software provider Wind River in 2022, beginning its expansion outside of the auto industry. The "new" Aptiv could be a diamond in the rough for investors who buy in at a historically depressed price-to-earnings ratio and valuation. If the company executes its spin-off, expands outside the auto industry, and maintains high EBITDA margins, the next few years should reward investors with a consistently rising valuation.

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Daniel Miller has positions in General Motors. The Motley Fool recommends Aptiv and General Motors. The Motley Fool has a disclosure policy.