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Morningstar | Adient Looks Cheap to Us, but Risks Around Timing of Restructuring and New CEO's Plan Remain

Adient's stock is down 63% from its 52-week high of over $86 per share, and shares recently moved into 5-star territory. We feel the stock is cheap, but we also stress that there is risk from how long the turnaround story in metals lasts. Furthermore, with U.S. auto sales having peaked for this cycle in 2016, in our view, we see significant weakness in stock prices across the board for our U.S. auto coverage. These challenges mean Adient, although attractively priced in our opinion, may stay cheap for a long time and get cheaper if the market were to begin pricing in a recession.

The company reports fiscal 2018 fourth-quarter results on Nov. 9, and that will be the first time we will hear from new President and CEO Doug DelGrosso, who joined on Oct. 1. As discussed in our Sept. 13 note, DelGrosso, 56, looks like a good hire to us because of prior CEO experience at two smaller auto suppliers and time at TRW. Most notably for seating, last decade he was president and COO of Lear. For now, we think the market is in wait-and-see mode to hear DelGrosso's plans, and we don't know how much of his strategic vision he will reveal on Nov. 9.

We think Adient's problems are fixable, and we see opportunities in nonauto markets, particularly high-end airplane passenger seats via a new joint venture with Boeing. The company does not have a major debt maturity until 2021, so it has time to fix its execution problems. These issues centered around Adient not asking for enough price increases, supplier problems forcing Adient to use expedited freight and add weekend shifts, and launch issues around the new 3000 line mechanisms product portfolio. Adient's Chinese metals joint ventures do not have the inefficient European businesses that Adient has at the consolidated level and generate EBIT margins in the mid- to high teens as opposed to a loss at the consolidated metals segment level. This suggests to us that Adient can turn around its consolidated operations.

Morningstar Select clients can read more about our thoughts on Adient's problems and its potential in autonomous vehicles and aerospace in our June 28 report "Narrow-Moat Adient Is Trading as if It Will Never Get Better."