How Mobileye Benefits From Federally-Mandated Automatic Braking

On Thursday, it was reported by the Associated Press that automatic braking would become standardized by 2022.

Prior to the announcement, Pacific Crest Securities speculated that the imminent announcement holds some significant benefit for advanced car technologies, particularly, Mobileye NV MBLY.

"Several blogs and media sources (Phys.org, CNBC, ABC News) are reporting that a mandated automatic emergency braking (AEB) announcement could be imminent," Pacific Crest's Brad Erickson stated. "We believe this would be positive for Mobileye, but relatively in line with our longer-term expectations. Our view that Mobileye will be a key beneficiary of ADAS adoption over the longer term does not change."

Erickson explained that while the shift would potentially be a positive catalyst for Mobileye, the research firm had already contemplated this move. Therefore, while the confirmation is likely to affect Mobileye in both the near term and long term, Pacific Crest's valuation and estimates have the adoption scenarios baked in, thus not necessitating any rating or valuation changes on the stock.

The Announcement

Automakers and the National Highway Traffic Safety Administration have come to an agreement regarding AEB, and according to the press release, the news is due out Thursday.

"Automakers will phase in the equipment on nearly all models except some with older electronic capabilities and some with manual transmissions, said the people, who spoke on condition of anonymity because terms of the agreement haven't been announced," the AP stated.

Related Link: Morgan Stanley Maintains Overweight On Mobileye, Lowers PT To $48.00

"Automatic emergency braking uses cameras, radar and other sensors to see objects in the way and slow or stop a vehicle if the driver doesn't react," according to the AP, "The technology already is available as an option on many models, but automakers are struggling with how to fit it into current product plans that might not be ready for the electronics. Making the feature standard equipment on nearly all cars will speed adoption of the technology."

Pacific Crest's Lingering Concern

While the move would be broadly positive for Mobileye, Pacific Crest did issue a concern regarding standard fitment of AEB. "Our issue with this type of a scenario […] is that standard fitment tends to be a long-term negative for suppliers," according to Erickson.

The Pacific Crest analyst then offered two key reasons to support his thesis:

• 1. Competition: "It invites competition because other suppliers know it's a guaranteed incremental revenue opportunity."
• 2. Pricing: "It serves as a jumping off point for pricing negotiations, where suppliers suddenly have a lot less leverage with OEMs."

"We think car makers will likely become much more price-sensitive for these options in the future given they won't have any option-based pricing power and that real MSRPs have been relatively flat for the past couple of decades," Erickson concluded.

"While MBLY would be a clear long-term beneficiary if reports of this legislation prove to be true, we've contended that several years of 40 percent to 50 percent year-over-year growth and an upward ASP trajectory to roughly $60 was to be expected within our $43 fair value estimate."

Mobileye was seen recently trading at $36.17, down 1.32 percent on the day.