GammaJPG @GammaJPG: "2/?? Did you know that 1968..."

Chile

2/?? Did you know that 1968 was the year in which a turbocharged car won the Indy 500 for the first time? And guess who made their turbocharger. That's right, our next company in this overview series (ft @Bjorncrienen ) 🚗 Overview $GTX is an American company founded in 1954. They design, manufacture and sell highly engineered turbochargers, which are systems that help introduce compressed air into internal combustion engines, mainly for the automotive, transportation and industrial machinery industry. The company was acquired in 2004 by $HON (Honeywell International Inc) , but was spun-off in 2018 as an independent company. In 2021, it entered Chapter 11 for a restructuring, which helped eliminate all the related liabilities incurred to it by Honeywell during the spin-off. It also helped to make the corporate and capital structure more efficient. They are currently allocating more than 50% of R&D budget into electrification and zero-emission technologies, which includes electric and hydrogen fuel cell vehicles. Garret maintains a culture of continuous product innovation, introducing about ten new technologies per year and upgrading its existing key product lines approximately every 3 years. It currently holds around 1300 patents. Their new technologies include such as Electric Turbo (E-Turbo), E-Cooling and Variable Nozzle Turbine (VNT). They also have the E-Powertrain, which gives 40% more power for the same packaging compared to current available traction devices. Their E-Powertrain has garnered numerous pre-development contracts with major global automakers in 2023. Related to EVs, they say that the application of electric boosting extends the requirement for engineering collaboration with OEMs to include electrical integration, software controls, and advanced sensing, so overall, the move to electric boosting increases the role and value of turbocharging by improving vehicle fuel economy and reducing exhaust emissions. In 2023, they manufactured more than 89% of their products in low-cost countries, including seven manufacturing facilities in China, India, Mexico, Romania and Slovakia. They believe that their global footprint, suppliers network and operational excellence across facilities is a key competitive advantage in their industry. 🚗 Financials They sell their products in Europe (48%), Asia (31%), North America (19%) and Others (2%). Their sales by segment are for the Gas (44%), Diesel (25%), Commercial Vehicles (17%), Aftermarket (12%) and Other (2%) segments . They supply products to more than 60 OEMs globally. Their top ten customers accounted for approximately 61% of net sales and the largest customer represented only around 12% of net sales in 2023. They expect to generate $1B in revenues from their zero-emission technologies by 2030, which is a 25.7% increase from their current revenue, that would only be a 3% CAGR increase from these technologies. This is quite disappointing since hybrid and electric vehicles are expected to grow at a CAGR of 12% and 29%, respectively (according to S&P). In 2023, their net sales were $3.88B USD (8% increase YoY). Their adjusted FCF (excludes some financial items) was $422M (35% increase YoY), while the GAAP FCF was $382M. Revenue has a CAGR of 3.3% for the last 9 years, with YoY growth rate in the range of -6% to 20%. FCF has grown around the same, although with more volatility. Their Market Cap is $2.14 B and it has Liabilities for $3.26 B, which gives it an EV of $5.4 B. This gives it a P/FCF of 6.13 and a EV/FCF of 10.25. Their Long-Term debt is $1.6 B, matures in 2028 and has an interest rate of floating interbank rate plus 3-4.5% fixed. They have a shares repurchase program for 2024 of up to $350M, which is 16% of current market cap (past shares repurchases have been of about $125 M/ year). They don’t plan to give a dividend in the foreseeable future. The shares have given a 5 year total return of 77%, while their peer group has returned -15%. The peer group is composed of $ADNT (Adient plc) , $ALSN (Allison Transmission Holdings Inc) , $AXL.US (American Axle & Manufacturing Holdings Inc) , $APTV (Aptiv PLC) , $BWA (BorgWarner Inc) , $MGA (Magna International Inc) , $VC (Visteon Corp) , $LEA (Lear Corp) and $GNTX. 🚗 Opinion There are already a lot of players competing for market share, which means that all the R&D spending is mostly just to keep current market share. I was expecting a better zero-emission revenue projection, since they claimed that their E-powertrain is able to deliver 40% more power for the same packaging size, which is huge for EVs, since weight is a big factor for them. So, overall, I think their growth potential is a bit better than the past, but not as much as I would like. On the price part, I think the EV/FCF of 10.25 is pretty fair. The $350 M share buyback sounds tempting, but at the same time I’m wondering why they are doing the buybacks when their LT debt interest rate is quite high, as a long-term holder I would prefer to see them pay most of the debt first.