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The Flourishing Car Interior Company You’ve Never Heard Of
- ELAINE LOW
- Three/06/2017
Violating up is hard to do, but sometimes it’s for the better, especially when one party isn’t investing enough in the relationship.
To hear one analyst tell it, that’s more or less what happened to Adient (ADNT), the automotive interiors heavyweight that spun off from Johnson Controls (JCI) last fall, little more than a month after Johnson finished its merger with Tyco International.
“They stopped investing in fresh technology, they stopped investing in capacity, they didn’t attempt to grow the business,” Baird analyst David Leiker said of Johnson’s management of the segment that included Adient. “There wasn’t a lot of interest in putting more capital into the business.”
Even before its announced marriage to fire and security systems specialist Tyco, Cork, Ireland-domiciled Johnson Controls had begun pulling away from the automotive space three or four years ago — despite auto products making up about half of its sales — as it looked to style itself as a truly multi-industry company.
That lack of interest motivated auto seating rivals Lear (LEA), Magna (MGA) and others to get “pretty aggressive” in taking market share, he said. And executives at Detroit.-based Adient, then called JCI Automotive Practice, were “frustrated” that the business was losing its edge under Johnson Controls.
One-Third Of Market
Post-split, Adient is a giant in its field, putting its market share at an estimated 34% globally. And its portfolio is exceedingly diversified, both by the automakers and geographies it serves.
A little more than a third of Adient’s business is done in North America, split fairly evenly among Ford Motor (F), General Motors (GM) and Fiat Chrysler Automotive (FCA). Another third of its consolidated sales are spread among more than half a dozen European carmakers. And 29% comes from Asia — mostly China — divvied up among Honda Motor (HMC), Nissan Motor (NSANY), Toyota Motor (TM) and Hyundai/Kia.
It is nevertheless “a business that, in some respects, is underperforming, because it wasn’t invested in over the last three years,” said Leiker, who has an outperform rating and seventy three price target on the stock.
But Adient is getting its groove back.
In the very first quarter of 2017, its very first as a stand-alone public company, Adient recorded 13% profit growth to $Two.12 a share, topping views for $Two.03, with CEO Bruce McDonald touting the commercial-vehicle seating contract it won during the quarter, and a 14% increase in its three-year seating backlog to $Two.Four billion. Its three-year backlog with joint venture Yanfeng Automotive Interiors grew to $Two.Three billion.
“You’re observing them make some of those investments that weren’t being made, you see them going after contracts that they weren’t going after before,” said Baird’s Leiker. “They’re winning business. They’re taking market share, and truly recouping a lot of what they lost during that time they were in limbo with Johnson Controls.”
Contracting Out
Aside from pursuing adjacent markets such as commercial vehicles, the company highlighted another growth driver during the call: automakers that could outsource their seating operations. During the quarter, Adient embarked manufacturing seating for the BMW 5-series, a task that was previously done in-house at BMW.
“We’ve talked about the fact that there’s still a pretty big chunk of the market available to us, especially in emerging markets with in-house players exiting the seating business, and same thing with smaller regional players (that are) shifting their production to big global players like Adient,” said McDonald during the earnings call in early February.
But revenue of $Four.04 billion fell brief of analyst estimates for almost $Four.Two billion, due to lower volume and other factors. The mixed results shortly weighed on shares, but most equity research pros emerge to be positive or neutral on the stock.
In late February, Morgan Stanley bullishly named the company its “fresh top pick” in the North American auto sector, and initiated coverage on Adient with an overweight rating and ninety five price target. Morgan Stanley analyst Adam Jonas called out its “growth and margin opportunities” and its “attractive risk-reward.”
IBD’S TAKE: Since going public on Halloween last year, Adient shares have turned in a choppy spectacle, tho’ have generally trended higher, going from around forty five on their very first day of trading to past the sixty five level. But the stock is well down the list of performers in IBD’s automotive equipment group, which is led by Mobileye (MBLY).
Adient is already unseating rivals in the hearts of some analysts. Jonas recommended that investors switch from Lear, and downgraded Lear stock to equal weight.
“The nature of ADNT’s business is powertrain-agnostic, insensitive to the budge from internal combustion to (electrified vehicles), which represents a significant challenge to many other suppliers under our coverage,” he wrote.
Higher Guidance
Elsewhere on the Street, Barclays rates the stock equal weight, while JPMorgan rates it at neutral. Both banks raised their price targets on Adient following its first-quarter report, in which the company reiterated full-year revenue outlook. Projections for $16.8 billion to $17 billion outshine current Street forecasts for $16.51 billion.
At the close Monday, shares ticked down eight cents to 67.79.
A potentially problematic spot — “if you want to pick on something,” suggested Baird analyst Leiker — is that the company has a superb deal of exposure to China via its seating products and 35% stake in the Yanfeng joint venture.
He is unperturbed, however, by murmurs that U.S. auto sales may have peaked after reaching record highs year after year.
“Auto sales are at the same level that we were in 2001, which was the last cycle peak, but we have 10% more households,” Leiker said. “So everything else equal, car sales should be 10% higher. So we think that there’s still some chance there.”
And management is solid as ever.
“I think they’re doing a excellent job,” said Leiker. “They’re on their own now, untethered, and they’re going to be able to do things without someone above them telling them to slow down.”