Analyst: Adient A Buy On Turnaround Strategy

Adient PLC (NYSE: ADNT) lost one bull and gained another Wednesday as analysts digested the auto supplier's guidance cuts and prospects for recovery.

The Rating

Longbow Research analysts Anthony Deem and Brian Bollenbacher upgraded Adient from Neutral to Buy and set a $68 price target. 

The Thesis

As far as Longbow is concerned, Adient's 2020 guidance reduction derisks the margin outlook and limits downside ahead of “material improvement in 2019 earnings” driven by a turnaround in the firm’s specialty sales and marketing segment.

The analysts forecast $200 million in SS&M’s 2020 earnings before interest, taxes, depreciation and amortization compared to a $116-million loss in the first half of this year.

“Catalysts are cost-driven and include eliminating premium freight, commodity cost recovery, supply availability and manufacturing efficiencies on a greater launch cadence,” Deem and Bollenbacher said in a Wednesday note. “Margin expansion and free cash flow improvements from de-emphasized lower margin/highly capital intensive SS&M are positives.”

At the same time, Adient intends to reduce a two-year SS&M backlog by about $200 million and realize “solid” opportunities in seating.

“ADNT is confident the historical win rate of 90 percent on [the] incumbent seating business is intact and the cadence of programs coming up for renewal is consistent too,” the analysts said. 

By Longbow’s assessment, Adient should reverse its two-year low-single digit declines and instead post organic growth beyond 2019 driven by the industry’s shift toward larger vehicles, 2-percent compound annual growth in production and share gains in China.

Price Action

Adient shares were down 0.74 percent at $56.20 at the time of publication Wednesday. 

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Photo by Matti Blume via Wikimedia.