Adient Stock: Consider Financial Outlook and Buyback Yield (NYSE: ADNT)

Summary in seconds

My rating for Adient plc (NYSE: ADNT) actions are a withholding.

I previously wrote about ADNT’s capital allocation and the impact of the United Auto Workers or UAW strike on the company in my September 26, 2023 article.. This latest article analyzes Adient’s financial outlook and its future share buybacks.

Adient deserves a Hold rating. I’m not impressed with ADNT’s outlook for the full fiscal year 2024, as the company’s guidance indicates a contraction in both its revenue and EBITDA for this fiscal year. On the other hand, the company is expected to continue significant share repurchases for the foreseeable future, and I estimate that ADNT’s forward repurchase yield is at an attractive single-digit percentage level.

Downgrade to full-year guidance was disappointing

Adient disclosed the company’s updated financial guidance for fiscal 2024 (September 30) in tandem with his Publication of second quarter results at the beginning of this month.

Specifically, ADNT’s full-year revenue forecast was lowered by -4%, from $15.45 billion to $14.85 billion. The company also reduced its fiscal 2024 normalized EBITDA guidance by -8%, from $985 million to $910 million (midpoint of guidance). This translates into expectations of a -4% revenue contraction and a -3% decline in non-GAAP adjusted EBITDA for Adient in the current fiscal year.

ADNT attributed the revision to its fiscal 2024 management guidance to “slower launch pads” and “softer electric vehicle production” in its second-quarter fiscal 2024 earnings presentation slides Adient’s feedback is aligned with information provided to its largest customers. As noted in its 10-K filing for fiscal 2023, the company has two significant customers each contributing more than 10% of its sales, namely Volkswagen Group (OTCPK:VWAGY) (OTCPK:VLKAF) (OTCPK:VWAPY ) and Stellantis NV (STLA).

Stellantis shipments for the North American market decreased -20% year-on-year in the first quarter of 2024. STLA noted during its first quarter results presentation that “portfolio transitions” had dampened the North American business of the company. Furthermore, Volkswagen mentioned during the first quarter 2024 earnings conference call that “demand for battery electric vehicles was muted at the start of the year in Europe and North America”. Specifically, Volkswagen’s battery electric vehicle deliveries for the US and European markets decreased by -16% year-on-year and -25% year-on-year in the first quarter of 2024, respectively.

Given the information provided by its major customers and management commentary, Adient’s lackluster guidance for fiscal 2024 appears realistic. In a nutshell, weaker demand for electric vehicles and a more moderate pace of new vehicle introductions are likely to hurt Adient’s performance this year, according to its earnings presentation commentary.

Attractive buyback yield supports share price

In my previous update from late September 2023, I noted that “ADNT appears well positioned to make substantial stock repurchases in fiscal 2024, when the UAW strike reaches its peak.” END “. This was the case, as Adient spent $100 million and $50 million on share repurchases in the first quarter of fiscal 2024 and the second quarter of fiscal 2024, respectively, after the strike concluded. of the UAW at the end of 2023.

I believe Adient will continue to allocate a significant portion of the company’s excess capital to share repurchases in the coming quarters. During its latest presentation of results for the second quarter of the 2024 financial year, ADNT stressed that it would “expect repurchases to continue” and indicated that “the pace (of future share repurchases ) should be quite similar”.

The company’s net leverage metric, calculated as net debt divided by EBITDA over the trailing 12 months, was 1.71 times at the end of the second quarter of fiscal 2024. The target of Adient is to have its net leverage between 1.50 times and 2.00 times, so there is no net leverage. There is no pressure on the company to set aside more capital for short-term deleveraging.

Additionally, Adient has sufficient financial liquidity, so most of its free cash flow can be allocated to capital return without any problems. The company expects to be able to generate $250 million in free cash flow in the current fiscal year, in line with its guidance. In comparison, ADNT has available liquidity of over $1.8 billion, which includes its cash and available credit line of $905 million and $974 million, respectively as of March 31, 2024.

My assumption is that ADNT will repurchase $50 million of its own shares each quarter, which is the same as what it did for the second quarter of fiscal 2024. This implies that the yield on forward repurchases of the stock (redemptions divided by market capitalization) will be an attractive 7.6%.

In the previous section, I noted that Adient’s outlook for the year 2024 is not particularly impressive based on its forecasts. But ADNT stock’s decline should be limited to a large extent by the stock’s attractive buyback yield.

Final Thoughts

A Hold rating for Adient is fair in my opinion. ADNT currently trades at a trailing twelve month EV/EBITDA of 6.2 times (source: S&P Capital IQ), which is aligned with its consensus FY2023-2027 EBITDA CAGR of +7.0%. Its EBITDA multiple and expected EBITDA growth rate are at a mid-to-high level, supporting the view that Adient’s valuations are reasonable based on the EV/EBITDA metric.

An expansion of ADNT’s EV/EBITDA valuation multiple in the near term is less likely, as the company’s financial outlook for the full fiscal year 2024 is not favorable. But a significant depreciation in Adient’s EV/EBITDA ratio is also unlikely, as the stock’s valuations are supported by significant share buybacks.