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Adient: Coronavirus Or Not, More Pain Left For Investors

Mar. 10, 2020 11:17 AM ETAdient plc (ADNT)FURCF, LEA, MGA, MG:CA1 Comment
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AMA Insights


  • Adient struggles with declining car sales, pricing pressures and high debt on balance sheet.
  • It has made some progress in selling non-core assets but the headwinds are too strong.
  • Coronavirus disruptions further strengthen headwinds for its low-margin business.
  • 2020 is likely to be a year of further margin compression.
  • Structural challenges with its business and industry headwinds put the stock in lead for sustained price erosion.

Investment thesis

Adient's (NYSE:ADNT) narrow focus on a low-value product, structural weakness in global automotive demand, and outbreak of Coronavirus make a strong case for lower prices. The company has embarked on selling non-core assets but this approach can only partially offset the headwinds.

A better quarter and untimely upgrade

Following a better than expected show in the first quarter earnings, Adient got an upgrade from Morgan Stanley. The Ireland-based automotive seating supplier divested and restructured some of its non-core businesses and this impressed Morgan Stanley analyst Adam Jonas. I'll explain in this article that the upgrade is premature.

Earlier this year, Adient sold its Recaro seating business that specializes in premium aftermarket seating solutions. The niche business was acquired by Adient in 2018 but has poor profitability with a top line of just USD150 million in 2019.

A more meaningful development took place during the first quarter in the form of sale of its 30% ownership stake in Yanfeng Automotive Trim Systems (YFAI) to joint venture partner Yanfeng. The stake sale in China JV yielded USD379 million and will be used to retire a portion of Adient’s debt which stood at USD3.74 billion as of 31 December 2019.

These developments, coupled with the reduction in leverage ratio, impressed Morgan Stanley to elevate the stock to Equal-weight rating with a target price of USD27. The brokerage house also attributed the upgrade to an improvement in the seat structures and mechanisms business and stabilizing production in China.

Stabilizing production in China – did I read that right?

The last bit will naturally raise eyebrows as the ongoing health scare in China due to Coronavirus has thrown a spanner in an already weak automotive demand scenario. The situation is so bad that car sales plummeted 80% in February according to the China

This article was written by

AMA Insights profile picture
Passionate about equity markets and process-driven investing. Combining value and momentum, interested in IPOs. Putting automotive industry knowledge acquired through day job to a good use.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in ADNT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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