PHINIA Inc. (PHIN): A Hidden Gem in the Combustion Engine Renaissance

The shift toward electric vehicles (EVs) has dominated headlines for years, but a quiet revolution is unfolding in the automotive sector: the extended lifespan of internal combustion engines (ICE). PHINIA Inc. (NYSE: PHIN), a spin-off from BorgWarner, is positioned to capitalize on this trend. With its focus on high-margin aftermarket parts, advanced fuel systems, and strategic acquisitions, PHIN offers a compelling investment opportunity in a niche market that's often overlooked. Let's dissect why this underappreciated stock deserves a closer look.

The Spin-Off Advantage: Focus and Flexibility

PHINIA emerged as an independent company in July 2023, spun off from BorgWarner to separate its legacy ICE assets from BorgWarner's EV-focused future. This strategic move freed PHINIA to concentrate on its core strengths: premium fuel systems, electrical components, and aftermarket solutions for combustion and hybrid vehicles. The separation also streamlined its financials, with PHINIA reporting strong free cash flow generation and a manageable debt load.

Hedge Fund Backing: A Signal of Confidence

Institutional investors have taken notice. Notable hedge funds like Voss Capital have dramatically increased their stakes, boosting holdings by 45.9% to 5.19% ownership in Q2 2025. Hite Hedge Asset Management also surged into the top buyers, tripling its position to 0.82% ownership. While some funds like Millennium Management reduced stakes, the net inflow from strategic buyers underscores PHIN's appeal. This support suggests investors see value in PHIN's undervalued stock price and its ability to profit from ICE's prolonged relevance.

Why ICE Isn't Dead Yet: Delayed EV Adoption Fuels Growth

The global transition to EVs is slower than predicted, driven by supply chain bottlenecks, high battery costs, and infrastructure gaps. In regions like Asia and Africa, combustion engines remain dominant due to affordability and infrastructure readiness. Even in advanced markets, hybrid vehicles—relying on ICE components—are bridging the EV gap. PHINIA's focus on aftermarket parts (e.g., remanufactured fuel injectors, ignition systems) and its recent $47 million acquisition of Swedish Electromagnet Invest AB (SEM) position it to capture this demand.

The SEM deal adds critical expertise in ignition systems for alternative fuels like hydrogen and ethanol, enabling PHINIA to optimize combustion efficiency and support low-carbon fuels. This aligns with its vision of becoming a leader in sustainable mobility solutions without abandoning ICE.

Financial Fortitude: High Margins and Growing Cash Flow

PHINIA's business model is cash-rich. Its aftermarket segment, which accounts for over 60% of revenue, operates with high margins (20–25% EBITDA) and recurring demand. The SEM acquisition further bolsters margins by expanding its product portfolio into high-value ignition systems. Pro forma financials post-SEM suggest adjusted EBITDA could rise to $300–350 million, with free cash flow improving steadily.

Valuation: A Bargain in a Niche Market

At a current valuation of $2.5 billion, PHIN trades at just 8x forward EV/EBITDA, a stark discount to peers like TRW Automotive (now ZF Friedrichshafen) or Denso Corp.. This undervaluation ignores PHIN's strategic advantages: a focused business model, low debt, and a secular tailwind from ICE's extended lifecycle. Analysts estimate a 20–25% upside to fair value if the market recognizes its niche potential.

Risks to Consider

• Regulatory headwinds: Stricter emissions rules could accelerate ICE's decline.
• Integration challenges: The SEM acquisition's success hinges on seamless integration.
• Commodity prices: Fuel system costs are sensitive to metal and energy prices.

The Investment Case: Buy the Dip, Hold the Trend

PHIN is a contrarian bet on the combustion engine's resilience. With hedge funds accumulating stakes, improving free cash flow, and a valuation that doesn't yet reflect its aftermarket dominance, the stock offers asymmetric upside. Investors seeking exposure to a “last-mile” ICE player with a clear path to sustainability should consider a position in PHIN.

Recommendation: Accumulate shares at current levels, targeting a 12-month price target of $55–$60, reflecting a 15–20% premium to its current valuation.

In a world fixated on the EV future, PHINIA reminds us that combustion engines—and the companies that support them—still have room to run.