Garrett Motion Stock Summary
Garrett Motion is a leading turbocharger manufacturer with high free cash flow yield and shareholder returns
Garrett Motion GTX 0.00%↑ is trading at a low cash flow multiple, and since I’m familiar with the brand as a racing enthusiast I thought it would be fun to look into this stock. Garrett is an automotive components manufacturer known for their turbochargers. The company also has been developing electric motor and battery cooling technologies for EV and hybrid vehicles. Turbochargers have been increasingly utilized by auto manufacturers to reduce engine sizes but maintain power, and thereby increasing fuel efficiency. Garrett has an interesting recent history, since it was spun out by Honeywell in 2018.
It looks like Honeywell saddled GTX with asbestos liabilities. In 2020, Garrett went into Chapter 11 restructuring to wipe out the asbestos liability. Post restructured GTX emerged with a good amount of debt and convertible preferred stock, which got converted last year. Despite the bankruptcy, Garrett’s financial performance was fine.
Over the last few years, GTXs stock price has bounced between $7 and $10. This year the stock was on a downtrend. The stock rallied 10% the other day on the news of Garrett’s 2025 shareholder return program.
Looking at their latest earnings release shows that sales are down a bit over 10% this year. Despite this, based on year to date performance and Q4 guidance, the company could do about $280M in free cash flow. This implies the company is trading at a FCF multiple of 6.8, or a 14% yield.
Turning to the balance sheet, GTX provides a bit of a let down. Through its spin off and restructurings, the company has negative shareholder equity. While this is an artifact of financial engineering, I would prefer to have a long history of growing equity. Garrett has $1.5B in long term debt with $2.2B in assets. Debt to EBITDA as about 2.2x, which is not terrible, but a little high for an auto parts supplier in my opinion. GTX has been paying down debt and their goal is to get their BB- credit rating up to investment grade.
Garrett has recently been returning a lot of cash to shareholders through share buybacks. So far this year GTX has bought back $226M in stock vs a market cap of $1.9B. The other day Garrett announced a new shareholder return plan for 2025. Their goal is to return 75% of free cash flow to shareholders. A new $50M a year dividend was part of the plan, so the balance will be more buybacks.
I think Garrett Motion has been trading at low multiples due to the drama of its spin off, and restructurings. Also I think the company is unfairly seen as an obsolete company since people are over optimistic that EVs will replace combustion engines. GTX benefits from the transition by making traditional cars more efficient, and they developing products for electrified cars. However the automotive industry is cyclical, and it appears we are partly in the down cycle with GTXs revenue declines this year. If we enter into a recession, Garrett will surely suffer. Besides a recession, I think Garrett can produce healthy revenue growth for the next five years or more.
Garrett Motion is an appealing stock to me with its low cash flow multiple, potential business growth, and high shareholder returns. The downside is the cyclicality and heavy debt load. I’ll have to chew on GTX for a while, but I lean towards wanting to buy it. I’m not sure yet what a good price is. But if over $200M is returned to shareholders next year, I would think the company would eventually trade at a shareholder yield of 5-8% instead of 10-12%.
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Garret is cheap, thanks for the reminder!