Navigating Challenges, The Company Leverages Financial Strategies And Innovations For Growth

Key Takeaways

• Garrett Motion's financial strategies and share repurchase program signal confidence in future growth, potentially increasing investor confidence and enhancing EPS.
  
• Solid performance and focus on innovation in both turbo and zero-emission technologies could diversify income sources and drive future revenue growth.
  
• Evolving automotive industry trends and regional market volatilities pose risks to revenue, with a heavy reliance on the turbo business potentially hindering long-term growth.

Catalysts

Designs, manufactures, and sells turbocharging, air and fluid compression, and high-speed electric motor technologies for original equipment manufacturers and distributors worldwide.

• Garrett Motion's strategic issuance of $800 million in senior unsecured notes at favorable interest rates and the repayment and repricing of term loans to generate annual cash interest savings of approximately $15 million could positively impact future cash flows and overall financial health, improving net income and increasing investor confidence.
  
• The company's share repurchase program, through which $65 million of common stock was repurchased in Q2 and a total of $174 million in the first half of 2024, could enhance earnings per share (EPS) and signal confidence in the company's future growth potential.
  
• Solid performance in Garrett Motion's core turbo business and significant progress in zero-emission vehicle technologies, including securing a series production contract for its largest fuel cell application, may drive future revenue growth and diversify the company's income sources, impacting revenue and net margins positively.
  
• Effective management of operational costs and a strong adjusted EBITDA margin of 16.9%, despite challenging market conditions, illustrate Garrett Motion's operational efficiency and fiscal discipline, which could contribute to improved net margins and earnings stability in the future.
  
• Garrett Motion's focus on innovation and developing new products for both its turbo range and zero-emission vehicle technologies, highlighted by securing several predevelopment awards and advancing in high-speed motor technologies, is set to impact future growth in revenue through market expansion and entering new industrial segments.

Assumptions

• Analysts are assuming Garrett Motion's revenue will decrease by -0.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 9.1% in 3 years time.
• Analysts expect earnings to reach $335.8 million (and earnings per share of $1.71) by about October 2027, up from $239.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2027 earnings, up from 7.4x today. This future PE is lower than the current PE for the US Auto Components industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 3.52% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.31%, as per the Simply Wall St company report.

Risks

• Softer global industry trends across light and commercial vehicles could lead to further decreases in net sales, impacting revenue negatively.
  
• Commodity deflation, while margin accretive, results in a direct reduction of sales, affecting top-line revenue.
  
• Regional dynamics, particularly in China and Europe, indicate volatility and uncertainty in market demand, potentially leading to unpredictable sales performance and impacting revenue and net margins.
  
• Heavy reliance on the turbo business in a transitioning automotive industry toward electric vehicles could slow growth or decrease demand for traditional combustion engine products, impacting long-term revenue.
  
• Operational execution risks in adapting to fast-evolving automotive technologies and maintaining competitiveness in zero-emission vehicle technologies could hinder growth prospects and affect earnings.

Valuation

• The analysts have a consensus price target of $12.5 for Garrett Motion based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.7 billion, earnings will come to $335.8 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 9.3%.
• Given the current share price of $8.12, the analyst's price target of $12.5 is 35.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.