On Monday, Morgan Stanley (NYSE:MS) initiated coverage of Phinia Inc. (NYSE:PHIN) with an Overweight rating on the stock and a price target of $50.00, highlighting the company's potential for strong cash flows and capital discipline. The firm sees Phinia as a leading example of what it terms the 'ICE (NYSE:ICE) is Nice' thesis, indicating that internal combustion engine (ICE) businesses might produce substantial cash for longer than the market expects.
Phinia's financial metrics appear favorable when compared to its peers. The company boasts a 100% free cash flow (FCF) conversion and offers an 8 to 9% combined cash return yield. According to the analyst, Phinia takes 6.2 years to spend its current market capitalization on capital expenditures (Capex) and research and development (R&D), which is slightly better than the median of its U.S. supplier peers at 5.7 years. In contrast, the S&P 500's average is approximately 55 times Capex and R&D spending.
The valuation of Phinia is also considered attractive by Morgan Stanley, as it is the cheapest among all U.S. suppliers covered by the firm on an enterprise value to forecasted fiscal year 2025 adjusted earnings before interest, taxes, depreciation, and amortization (EV/FY25 Adj. EBITDA) basis, trading at 4.2 times.
Morgan Stanley suggests that while other players in the U.S. auto industry continue to invest heavily in electric vehicle (EV) and autonomous vehicle (AV) technologies, Phinia's disciplined approach to capital expenditure will likely be recognized and rewarded by the market.
The firm acknowledges that there may be pushback from investors concerned about the long-term value of ICE assets, but it believes that the valuation gap will narrow as the market comes to appreciate the extended timeline for the secular decline in ICE adoption and the resulting cash flow to shareholders.
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