Down 14% in one month, is this car stock a buy?

Based in Switzerland Garrett movement (NASDAQ: GTX) sells turbochargers to the automotive industry. Its turbochargers are fitted to electric hybrid cars, gasoline cars and light commercial vehicles. In addition to its turbocharger business, Garrett invests in software and powertrains for all-electric cars.

Amid a global shortage of auto chips and a weakening euro, the company provided investors with encouraging numbers and an even more encouraging outlook. Even so, the stock is down around 14% since the end of June, while the broader market has rallied. Is it a good time to consider Garrett Motion?

Supercharged income

Last week, Garrett Motion reported strong earnings. Revenue remained stable given the weak euro. That may not sound very encouraging, but quarterly revenue was 600 basis points (or 6 percentage points) higher than estimated global light vehicle production.

Image source: Getty Images.

Garrett Motion operates in a duopoly with BorgWarnerof the turbocharger segment, which offers both of them significant pricing power. Thus, price increases during the quarter offset cost inflation for the business. Volumes in the quarter were down from the first quarter, but demand started to come back after the books closed in the first quarter.

This matches Garrett’s client Ford, which reported a 50% increase in revenue in the second quarter thanks to improved volumes. For the full year 2022, Ford estimates its wholesale revenue to improve by 10-15%. Ford management also believes the chip shortage will continue to ease in the second half of the year. These are encouraging signs for Garrett.

In the second quarter, Garrett also fully redeemed its Series B preferred stock held by the former parent company. Honeywell, placing his recent bankruptcy firmly in his rearview mirror. Garrett was separated from Honeywell in 2017 with a nagging asbestos liability that was completely unrelated to Garrett. In November 2020, the company voluntarily filed for bankruptcy to absolve itself of liability. During the bankruptcy, Honeywell agreed to accept redeemable Series B Preferred Shares in exchange for liability.

Since emerging from bankruptcy in April 2021, Garrett’s ample free cash flow has enabled it to improve its net debt to EBITDA multiple from 2.33x to 1.87x.

Is the stock a buy?

The future looks bright for Garrett. The company sees a huge growth opportunity in its light vehicle business. About 44% of gas-electric hybrid engines used turbochargers in 2021. As hybrid-electric cars continue to sell, Garrett estimates that the percentage of electric hybrids using turbochargers will increase to 52% by 2024. In a another sign of Garrett’s market dominance, he has already contracted more than 94% of his 2023 and 2024 revenue.

The bugaboo with Garrett is that fully electric vehicles don’t use turbochargers. Although aftermarket turbochargers and hybrid electric use should continue to drive the company’s growth, Garrett is diving into the electric vehicle market. The company devotes more than 50% of its research and development budget to its EV business, which includes EV software, electric powertrain supercharging and air compressors for hydrogen fuel cells.

In its second quarter report, management raised its guidance for the full year. Garrett now expects constant currency net sales growth of 5% to 10%, up from his previous forecast of 1% to 6%. On top of that, the net income forecast has gone from $250-295 million to $290-335 million.

Garrett also plans to start buying back shares. Its board of directors authorized a massive $100 million share buyback program. Redemptions will be split 4 for 1 between its Series A Convertible Preferred Shares and its common shares.

Garrett is a small company with a market cap of just $430 million. Based on management’s net earnings forecast and adjusting for the conversion of its Series A preferred stock, the stock trades at a forward P/E of about 6.5x at recent prices. That’s an attractive valuation for a high-quality company like Garrett Motion.

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BJ Cook holds positions at Garrett Motion Inc. The Motley Fool recommends BorgWarner. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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