Fructivore Investments

Garrett Motion Inc. is a maker of turbochargers, compressors, and related technologies for vehicles, primarily for internal combustion engines but the company adds, almost defiantly, that they are devoting considerable research into adapting their product lines to electric vehicles in the form of compressors for fuel cells or circulating coolant. Sales have improved over the last few years, although somewhat offset by the strong dollar (the company does most of its work in Europe and China) and it offers an earnings yield of upwards of 13% that looks sustainable for the foreseeable future.

The company has an interesting corporate history; it emerged from Chapter 11 a few years ago, but this was not in order to avoid a default on its debts. Rather, it was because the company, which was spun off of its parent company Honeywell, was forced to indemnify Honeywell for asbestos liability, and this was an undeserved millstone around its neck as we have seen in other companies like OI Glass. Last year Garrett redeemed the preferred stock that was created by the sponsors of the bankruptcy, giving it a normal capital structure and improving clarity for the analyst.

Turning to the figures, Garrett has a market cap of roughly $1.8 billion. In 2023, net sales were $3.886 billion, gross profit was $756 million, operating profit was $509 billion, interest expense was $159 million and taxes were $86 billion, producing $261 in net profit. The company’s capital expenditures are in line with its depreciation charges, and I should note that the company also engages in significant research and development, which some analysts do not recommend writing off entirely as they may translate into improved income down the line, although this is uncertain.

In 2022 net sales were $3.603 billion, gross profit $683 million, operating profit $467 million, no interest at all (unfortunately the company had to take on some debt to redeem the preferred shares), taxation was $106 leaving $361 million.

In 2021 net sales were $3.633 billion, gross profit $707 million, operating profit $491 million, interest expense $83 million, taxes $43 million, producing net income of $345.

Year to date, sales were $1.805 billion for the first two quarters as compared to $1.981 billion last year. The company cites weakness in automotive demand slightly offset by aftermarket parts. Gross income was $357 million versus $391 million and operating income was $232 million versus $272 million. Interest expense, net of a writeoff of debt issuance costs, was $66 million compared to $56 million last year, leaving $166 million, or $127 million after actual taxes, as compared to $159 million for the first two quarters of 2023.

Although it is unclear how long, if at all, transition away from internal combustion or hybrids into full electric vehicles will take, for the present and foreseeable future GTX offers an attractive earnings yield well in excess of 10%, although the exposure to the auto industry suggests that volumes can be expected to be variable. Furthermore, the Federal Reserve finally cutting interest rates may be of some assistance, and there I can recommend Garrett Motion as an intriguing candidate for portfolio inclusion.

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Investing by grocca