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Garrett Motion Stock Could Be Turbocharged if the Company Does Th…

By George Leong, B.Comm. Published : February 7, 2023

Garrett Motion Stock Could Be Turbocharged if the Company Does This

GTX Stock Is an Auto Tech Stock for Contrarian Investors

The COVID-19 pandemic led to significant microchip shortages globally, which had negative impacts on vehicle production. The supply situation has vastly improved, but now there are concerns about market demand.

Take the case of Garrett Motion Inc (NASDAQ:GTX). The company develops and manufactures turbocharging systems for global automakers. The systems are designed for broad usage, including in gas, diesel, natural gas, fuel cell, and electric vehicles (EVs). (Source: “Our Story, ” Garrett Motion Inc, last accessed February 6, 2023.)

Garrett Motion formerly operated as Honeywell Transportation Systems, prior to its spin-off from Honeywell International Inc (NASDAQ:HON) in 2018.

A problem that has crippled Garrett Motion stock is the company’s significant net debt of $937.0 million. Garrett Motion Inc filed for Chapter 11 bankruptcy protection in 2020, but debt risk continues to haunt the company. Investors’ concerns about the company’s debt led GTX stock to fall to $1.30 in September 2020.

As of this writing, Garrett Motion Inc has a market valuation of only $514.0 million.

My view is that Garrett Motion stock will rally if the company resolves its debt problem.

Chart courtesy of StockCharts.com

Garrett Motion Inc Needs to Deal With Its Debt

Garrett Motion has generated annual revenues at the $3.0-billion level since 2017. The company delivered a record $3.6 billion in revenues in 2021, up by 19.7% compared to 2020. Therefore, revenues aren’t an issue for the company.

Garrett Motion Inc trading at a mere 0.14 times its 2021 revenue points to value, but the company’s overhanging debt risk is problematic.

Looking ahead, analysts estimate that Garrett Motion will report flat revenues of $3.7 billion for 2022 and follow that with revenue growth of 7.9% to $3.9 billion in 2023. (Source: “Garrett Motion Inc. (GTX),” Yahoo! Finance, last accessed February 6, 2023.)

Fiscal Year Revenues (Billions) Growth
2017 $3.1 N/A
2018 $3.4 9.0%
2019 $3.3 -3.8%
2020 $3.0 -6.6%
2021 $3.6 19.7%

(Source: “Garrett Motion Inc.” MarketWatch, last accessed February 6, 2023.)

On the plus side, Garrett Motion has produced consistent earnings before interest, taxes, depreciation, and amortization (EBITDA) income.

Fiscal Year EBITDA (Millions) Growth
2017 $570.0 N/A
2018 $601.0 5.4%
2019 $537.0 -10.7%
2020 $375.0 -30.2%
2021 $599.0 59.7%

(Source: MarketWatch, op. cit.)

On the bottom line, Garrett Motion Inc delivered four straight years of positive generally accepted accounting principles (GAAP) diluted earnings per share (EPS).

My concern is that the company’s profits have declined in the last four years. The $0.37 per diluted share in 2021 was Garrett Motion’s lowest GAAP diluted EPS since its loss in 2017, and this is despite record revenues that year.

Garrett Motion Inc will need to improve its profitability. Analysts estimate that its adjusted earnings declined to $1.16 per diluted share in 2022, compared to $1.56 in 2021. For 2023, the company is expected to report $1.13 per diluted share. (Source: Yahoo! Finance, op. cit.)

Fiscal Year GAAP Diluted EPS Growth
2017 -$13.26 N/A
2018 $16.21 222.2%
2019 $4.12 -74.6%
2020 $1.05 -74.5%
2021 $0.37 -64.7%

(Source: MarketWatch, op. cit.)

Garrett Motion Inc was unable to generate positive free cash flow (FCF) in its last two reported years. Its worst year in terms of reported FCF was 2021.

Fiscal Year FCF (Millions) Growth
2017 -$32.0 N/A
2018 $278.0 968.8%
2019 $140.0 -49.6%
2020 -$55.0 -139.3%
2021 -$382.0 -594.6%

(Source: MarketWatch, op. cit.)

Analyst Take

Despite Garrett Motion Inc’s debt risk, its stock has relatively high institutional ownership, with 243 institutional investors holding a 78.7% stake in GTX stock. (Source: Yahoo! Finance, op. cit.)

Nevertheless, the market is clearly betting against stock, as evidenced by the heavy short position of 4.9 million shares, or 28.1% of the Garrett Motion stock’s float.

If Garrett Motion Inc can stay afloat and improve its debt situation and profitability, GTX stock should rise (and the short sellers will cover their positions).

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