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Garrett Motion: High-Quality and Cheap Valuation

Swiss differentiated automotive technology leader Garrett Motion (GTX) has come a long way from its bankruptcy filing in 2020, achieving double-digit revenue and earnings growth in its fiscal 2021. With bullish growth prospects, we think GTX is an ideal investment bet on the dip. Read on.

Headquartered in Rolle, Switzerland, Garrett Motion Inc. (GTX) is a differentiated technology leader that manufactures turbochargers, electric-boosting technologies, and automotive software solutions for vehicle original equipment manufacturers (OEMs).

Despite the continuing semiconductor shortage that is affecting the global automotive industry, GTX’s net sales increased 19.7% year-over-year to $3.63 billion in its fiscal year 2021. Its adjusted EBITDA and net income improved 38% and 518.8%, respectively, from the same period last year to $607 million and $495 million. Its adjusted free cash flow came in at $367 million, up 186.7% from its year-ago value. And the company’s flexible cost structure and supply chain allowed it to meet its revised 2021 financial targets and boost cash flows.

Shares of GTX have gained 22.7% in price over the past year, outperforming the benchmark S&P 500’s 5.3% returns over this period. However, the stock has slumped 1-.3% in price year-to-date due to the broader market correction and bearish investor sentiment.

Here is what could shape GTX’s performance in the near term:

Discounted Valuation

In terms of forward P/E, GTX is currently trading at 6.29x, which is 53.3% higher than the 13.46x industry average. In addition, the stock’s 2.74 forward EV/EBITDA multiple is 68.5% lower than the 8.71 industry average.

Furthermore, GTX’s 0.12 and 0.44 respective forward Price/Sales and EV/Sales ratios compare with the 0.98 and 1.15 industry averages.               

Better-than-industry Profit Margins

GTX’s 16.85% trailing-12-month EBITDA margin is 32.9% higher than the 12.68% industry average. Its trailing-12-month net income margin and levered free cash flow margin of 13.63% and 10.79%, respectively, are significantly higher than the 6.61% and 4.77% industry averages.

In addition, GTX’s 65% ROTC is 709.6% higher than the 8.03% industry average, while its 18.29% ROA is 199.2% higher than the 6.11% industry average. Also, the company’s 1.27% trailing-12-month asset turnover ratio is 19.9% higher than the 1.06% industry average.

Potential Increase in Shareholder Returns

GTX has been taking several steps of late to maximize shareholder returns. Last November, the company authorized a $100 million share repurchase program, which is valid through Nov. 15, 2022. The company expects to improve its capital structure and optimize its capital allocation and development strategy through this share repurchase program, while boosting shareholder returns.

Last December, TX announced plans to accelerate and expand its series B preferred stock redemptions. This was expected to reduce GTX’s debt by $411 million in its fiscal 2022 first quarter (ended March 31, 2022). By deleveraging its balance sheet, GTX’s capital structure should improve substantially, thereby maximizing capital return to shareholders.

Regarding this, GTX President and CEO Olivier Rabiller said, “Debt reduction actions, combined with our recently announced $100 million share repurchase program, highlight the continued progress that Garrett has made in positioning the company for success as we pursue our strategic growth initiatives in the evolving powertrain industry.”

POWR Ratings Reflect Rosy Prospects

GTX has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

GTX has an A grade for Value and a B for Quality. The stock’s discounted valuation compared to its peers justifies the Value grade. In addition, GTX’s impressive profit margins account for the Quality grade.

Among the 69 stocks in the Auto Parts industry, GTX is ranked #5.

Beyond what I have stated above, view GTX ratings for Momentum, Stability, Sentiment, and Growth here.

Bottom Line

In April last year, GTX successfully restructured its business to emerge from pending Chapter 11 bankruptcy. Since then, the company has made stellar progress, as evidenced by its double-digit revenue and net income growth year-over-year last year. As the global semiconductor shortage eases gradually, GTX’s profit margins are expected to rise further. Also, its deleveraging and share buyback plans should boost shareholder returns significantly in the near term. Thus, given its discounted valuation, we think the stock could be an ideal investment bet now.

How Does Garrett Motion (GTX) Stack Up Against its Peers?

While GTX has a B rating in our proprietary rating system, one might want to consider looking at its industry peers, Ituran Location & Control Ltd. (ITRN) and Genuine Parts Co. (GPC), which have an A (Strong Buy) rating.

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GTX shares were unchanged in premarket trading Monday. Year-to-date, GTX has declined -12.33%, versus a -7.54% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.


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