GTX - Garrett Motion: Undervalued But Poor Financials

2023-03-07 10:49:14 ET

Summary

• Garrett Motion posted disappointing FY22 and Q4 FY22 results.
• FY23 revenue guidance suggests stagnant revenue growth.
• GTX stock is stuck in a range for last two years.
• I assign a hold rating on GTX.

Garrett Motion ( GTX ) manufactures and designs turbochargers and electric-boosting innovations for light and commercial vehicles worldwide. They provide light gasoline, diesel, and electrified vehicles and offer automotive software solutions. It was incorporated in 2018. They recently posted FY22 and Q4 FY22 results . Their revenue and net income declined in FY22 compared to FY21. In this thesis, I will analyze its financial performance and discuss its growth potential in the coming quarters. According to the revenue forecast for FY23, revenue growth will remain flat. The business is also exposed to several risks and may still do so in the future. Hence, I assign a hold rating on GTX.

Financial Analysis

GTX recently posted its Q4 FY22 and FY22 results . They missed the market revenue estimate by 5.3%. The net sales for FY22 were $3.6 billion, a drop of 1% compared to FY21. I believe the main reason behind the stagnant revenue growth was lower volume in China due to the Covid lockdown, which caused net sales to drop by 3% in China. The net income for FY22 was $390 million, a decline of 21.2% compared to FY21. I believe the main reason behind the drop was unfavorable FX impact due to the weaker Euro. The gross profit for FY22 was 19% which was 19.5% in FY21. In my opinion, their financial performance in FY22 was quite disappointing. In FY22, they saw decreases in sales, net income, and gross profit margin.

The net sales for Q4 FY22 were $898 million, a rise of 4.1% compared to Q4 FY21. I believe the main reason behind the surge was solid recoveries on inflation pass-through and a better product mix, mainly owing to the aftermarket and commercial vehicles. The net income for Q4 FY22 was $112 million, a decline of 12.5% compared to Q4 FY21. I believe the main reason for the drop was increased tax expenses. In my opinion, the financial performance of GTX was quite disappointing; there were several factors that I think affected its financial performance, like high inflation, supply chain disruptions, semiconductor unavailability, volatility in production, low demand in China.

Technical Analysis

GTX is trading at the level of $8. We can see that the stock is stuck between the range of $6.5 and $8.5. It has been consolidating in the range since June 2021. I recommend not taking any fresh position in the stock while it consolidates. If the stock breaks out of $8.5, it can reach $11.5, but if it breaks down $6.5, it may drop to $4. So, in my view, one should hold off on buying any shares of the stock until $8.5 is broken.

Should One Invest In GTX?

The revenue estimate for Q1 FY23 is at $896 million, a decline of $2 million compared to Q4 FY22 revenue. The revenue guidance shows that the management expects stagnant revenue growth. I believe several factors might affect its business operations, and it might face difficulties in achieving its revenue targets. A shortage of semiconductors globally, declining revenues in Asia, and low demand for commercial vehicles in China are the factors I think can affect their revenue in FY23.

Now talking about the valuation part. I will use two valuation ratios to judge its valuation. The first ratio is the Price / Sales ratio. It shows how much it costs to purchase one share of a company in comparison to the amount of income that share brings in for the business. They have a Price / Sales ((FWD)) ratio of 0.14x compared to the sector ratio of 0.93x. It shows that they are undervalued. The second ratio is the EV / EBIT ratio. This ratio compares a company's enterprise value to its income before interest and taxes. They have an EV / EBIT ((FWD)) ratio of 3x compared to the sector ratio of 13.53x. After looking at both the valuation metric, I believe they are undervalued and have great growth potential. If they can tackle problems like semiconductor unavailability and inflation, they have great growth potential in the long term. But in the short term, I don't see them giving returns to its shareholders.

Risk

They rely on their clients' ongoing development, viability, and financial stability; a sizable percentage of these clients are OEMs in the automotive sector. The overall state of the economy and other elements, such as consumer preferences, interest rates, and fuel prices, have an impact on the automotive sector. The automobile industry is also sensitive to market conditions, especially as the industry develops. Examples of these conditions include quick technological advancements frequently prompted by regulatory changes, fierce competition, short product life cycles, supplier stability, and capacity limitations. Whether directly or indirectly through its customers and suppliers, the state of the economy and the industry have had an impact on and will continue to have an impact on the company.

Bottom Line

Although they are undervalued, in my opinion, they might face various uncertainties and risks in the coming times, making it a risky investment for now. In addition, they posted disappointing annual results with stagnant revenue growth, and their net income declined in FY22 compared to FY21. The revenue guidance also suggests that the management expects slow revenue growth in the coming quarters. So, after considering all the factors, I believe one should not invest in GTX for now. Hence, I assign a hold rating on GTX.

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