I continue to rate Adient plc’s (NYSE:ADNT) shares as a Hold. In my previous update for ADNT written on October 29, 2021, I cautioned that “the chip shortage and commodity price inflation headwinds have shown no signs of abating in the short term.” This latest article specifically touches on Adient’s 2022 business outlook and capital allocation priorities which have drawn the market’s attention.
Unlike prior years, Adient has not provided specific EBITDA forecasts for the current fiscal year, and this is a reflection of the challenging business environment that it currently operates in. Nevertheless, it is quite apparent that Adient will see a sharp decrease in its bottom line for FY 2022. On the other hand, Adient’s current valuations have priced in the company’s 2022 headwinds to a large degree. ADNT’s valuations could possibly re-rate going forward, if and when it starts paying dividends and carrying out share repurchases. A Hold rating is deemed as fair for ADNT after considering both the bull and bear arguments for the stock as highlighted in this article.
Spotlight On Lack Of Specific EBITDA Guidance And Cut In Consensus Forecasts
Adient guided at the company’s most recent Q1 FY 2022 (YE September) earnings call that its adjusted EBITDA for full-year fiscal 2022 “will be modestly lower versus our fiscal 2021 pro forma results of about $810 million.” This represents a departure from ADNT’s usual practice of providing specific forward-looking EBITDA guidance in quantitative terms. As an illustration, Adient specifically guided for a $1.0-1.1 billion YoY growth in adjusted EBITDA for FY 2021 at its Q4 FY 2020 results briefing.
ADNT had explained at the recent quarterly earnings briefing that it is not offering specific EBITDA estimates for FY 2022 as a result of uncertainty caused by “the ongoing supply chain disruptions, limited visibility of customer production schedules and labor concerns.” At the same time, Wall Street analysts have been slashing their top line and bottom line forecasts for ADNT to reflect this uncertainty.
The sell-side expects Adient to report a net loss for Q2 FY 2022, just like Q1 FY 2022 when it suffered from a net loss per share of -$0.38. Furthermore, the consensus non-GAAP adjusted earnings per share forecasts for ADNT in Q3 FY 2022 and Q4 FY 2022 have been reduced by -51% and -19%, respectively, in the past six months. Similarly, Adient’s consensus full-year bottom line estimate was cut by -13%, -29% and -64% in the last one month, three months, and half a year, respectively. Wall Street sees Adient’s non-GAAP adjusted earnings per share decreasing by -36% from $2.08 in fiscal 2021 to $1.33 in fiscal 2022.
It is definitely very difficult to forecast Adient’s financial performance for FY 2022, considering that there are so many moving parts that could affect ADNT’s actual numbers. But it is clear that ADNT’s FY 2022 earnings will certainly be worse that of FY 2021, which points to a bleak outlook for Adient in the current fiscal year.
On the positive side of things, Adient revealed at the Bank of America (BAC) Global Automotive Summit on April 12, 2022 that it has “started to see a little bit of relief in the commodity markets” and experienced “success with renegotiating contracts with our customers.” This gave the company the confidence to reduce its estimate of the full-year FY 2022 negative impact of commodity headwinds to -$95 million in February 2022 (prior forecast was -$125 million highlighted in November 2021).
Potential For Increased Capital Return And Further Debt Reduction
Putting short-term challenges aside, investors should focus on Adient’s capital allocation which is an important factor in driving value creation for the company in the long run.
ADNT has $2,080 million of cash and $3,656 million of debt on its books as at the end of 2021 (calendar year). Adient’s cash balance is significant, representing almost 60% of its current market capitalization. The company mentioned at its Q1 FY 2022 results call that it is allocating approximately $1 billion to debt repayment for fiscal 2022. This implies that Adient still has capacity for increasing shareholder capital return. ADNT noted at the April 2022 Bank of America Global Automotive Summit that “dividend’s definitely on the table” and highlighted that it “would look to do some share buybacks and take advantage of that (company’s share) price.”
Adient has suspended dividend payments since the second quarter of fiscal 2019, and sell-side consensus forecasts sourced from S&P Capital IQ suggest that the market expects ADNT to resume dividend payouts by the fourth quarter of fiscal 2022.
In the subsequent section, I discuss if Adient’s current stock price and valuations are supportive of share repurchases.
In a nutshell, lower financial leverage and higher shareholder capital return in the future will be seen as the positive results of optimal capital allocation for ADNT.
Peer’s Takeover Offer Prompts A Review Of ADNT’s Valuations
A February 23, 2022 Seeking Alpha News article mentioned that automotive supplier Tenneco (TEN) received a takeover offer from Apollo Global at a “100% premium.” In the article, it was also speculated that “Apollo may have been attracted by Tenneco shares trading with a 4.7x P/E multiple and 0.32 EV/sales multiple.” This brings the market’s attention to listed automotive suppliers whose share prices have been hit by multiple challenges relating to supply chain disruptions and commodity price spikes in recent times.
Adient’s valuations are also very appealing and comparable with that of TEN. According to consensus financial forecasts sourced from S&P Capital IQ, Adient is valued by the market at consensus forward FY 2023 and FY 2024 Enterprise Value-to-Revenue multiples of 0.30 times and 0.27 times, respectively. ADNT also currently trades at 7.9 times consensus forward FY 2023 P/E and 5.3 times consensus forward FY 2024 P/E.
As such, it will be value-accretive for Adient to buy back its own shares at current price levels.
Adient should find it hard to deliver a decent financial performance for full-year fiscal 2022. This is validated by the fact that ADNT has declined to offer actual EBITDA estimates for the current fiscal year. On the flip side, commodity prices might have already eased to some extent, and Adient has been able to pass on some of the cost increases to its clients through discussions.
More significantly, ADNT’s valuations are undemanding, and one of its automotive supplier peers trading at similar levels has been the subject of a proposed buyout. Also, Adient has $2 billion of cash at hand, which it can make good use of to deleverage, pay out dividends and buy back its own shares.
Taking into account both the pros and cons associated with an investment in Adient now, I assign a Hold rating to ADNT’s shares.