Ingevity Shares Caught In The Crosshairs Of Domestic Auto Sales Concern -- Maybe Incorrectly

“Weak North American vehicle sales in the month of March – and refreshed investor concerns about “peak auto” sales, more pointedly – has the market fading stocks with disproportionate auto end-market exposure,” Aegis Capital’s Chris Kapsch said in a note. He said Ingevity Corp’s (NYSE: NGVT) shares were “caught in the crosshairs,” with profit taking driving the stock down 5-6 percent over the last couple of days.

The analyst maintained a Buy rating on the company, while raising the price target from $60 to $67.

Growth Story

Kapsch, however, mentioned, that Ingevity’s growth story is significantly more about “mandate-driven penetration,” which is expected to almost double the Performance Materials (PM) segment’s North American sales, while leading to 7-8x growth in the content per vehicle in China over the next several years.

“This year, even against a backdrop of softer North American auto sales, NGVT is poised to benefit from another ~20 percentage points of incremental fleet penetration of Tier 3 evaporative emission standards, when automakers begin producing model year 2018 vehicles this summer,” the analyst stated.

In fact, Kapsch believes any sustained weakness in the stock would present a buying opportunity.

Management Upbeat

Following discussions with management, the analyst noted management was upbeat and that Ingevity was likely to be able to beat its FY2017 guidance, with recent “fundamental inflections” indicating potential upside from the Performance Chemicals (PC) segment.

With 20 percentage points of Tier 3 penetration, Kapsch expects domestic carbon content per vehicle to improve 15-20 percent in FY2017.

Ingevity’s profits are also expected to grow at a higher rate, driven by better margins associated with the higher Tier 3 content.

In addition, the analyst believes that domestic PM revenues would grow 11-12 percent.