cleveland research company stock pitch competition finalist presentation

1Cleveland Research Company Stock Pitch 2016

Michael Kress | Nicholas Meyerson | Nguyen Nguyen | Joseph Whiteside

NYSE:MBLY

Overview & Thesis 3Industry Dynamics

Drivers & Growth Opportunities

Valuation

Final Thoughts

Appendix 1918

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.

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

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

❖ 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

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

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

❖ 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

DriversPowerful Technology

Capital Structure Sustaining Growth

❖ 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

Sustaining GrowthLegal Tailwinds Future OEM Contracts & Launches

OEM AM

❖ 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

Somewhere/Everywhere Tradeoff“Somewhere” “Everywhere”

Mobileye Solution Solution Launch

❖ “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.

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

❖ 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

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

❖ 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%

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

❖ 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

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

❖ 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

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

❖ 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

ValuationComparables Analysis Football Field Valuation

DCF (Perpetuity & Exit EBITDA Multiple) Sensitivity Analysis

❖ 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

Valuation (cont.)Perpetuity Growth Method EBITDA Exit Multiple Method

Calculation of WACC Comparables Analysis

Final Thoughts

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.

Appendix

Income Statement

Balance Sheet

Statement of Cash Flows

Discounted Cash Flow Analysis

Comparables Analysis

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