Garrett Motion (GTX) Stock: Looks To Remain Rangebound

Garrett Motion Inc. (NASDAQ:GTX) has traded in a fairly tight pattern since it dropped to a low of approximately $1.40 per share on September 21, 2020, about the time the company declared bankruptcy.

It eventually climbed out of that share price hole and bounced back to about $8.70 per share (its post-bankruptcy high) before falling back to trade in a range of about $5.50 per share to $7.70 per share, from mid-July 2021 to today.

Starting in early June 2022, the stock started to trade in a more volatile fashion, seeming to reflect investor uncertainty as to what direction it was going to take.

In this article we’ll look at its latest earnings numbers and what they suggest for the company’s future performance, the weakness in its mix, the implications of economic headwinds that are likely to hamper the performance of the company throughout 2023, and the possibility it’s attracting interest from a suitor to make an offer for the firm.

Some of its latest numbers

Garrett Motion Inc. revenue in the third quarter came in at $945 million, beating estimates by $37 million; it was up 13 percent on a GAAP basis, and up 25 percent on a constant currency basis.

For the first nine months of 2022, revenue was $2.7 billion, dropping from the $2.78 million in revenue for the first nine months of 2021.

Net income in the quarter was $105 million, with a net margin of 11.1 percent.

EPS in the reporting period was $0.21, missing by $0.01. EPS in the third quarter of 2021 was $0.09. Earnings per share in the first nine months of 2022 was $0.52, compared to EPS of $1.46 for the first nine months of 2021.

Cash and cash equivalents at the end of the third quarter was $159 million, down from the $423 million in cash and cash equivalents held at the end of calendar 2021. It also had $475 million left undrawn on its credit facility. The company holds long-term debt of $1.1 billion.

For full-year 2022, Garrett Motion lowered its net sales range to $3.57 billion to $3.67 billion; lowered its adjusted EBITDA to $545 million to $560 million; lowered its net cash from operations to $380 million to $440 million; and lowered its adjusted free cash flow range to $380 million to $440 million; based upon a lower expectations for Q4 2022.

Taking into consideration the third quarter numbers, the nine-month numbers and management guidance, GTX had a better first half of the calendar year, even with a decent third quarter performance. It appears the company is going to slow down in the fourth quarter, and based upon macro-economic headwinds, is probably going to struggle to maintain momentum in the first half of 2023, and possibly longer.

Possible sale

In early November 2022 there was a report that GTX was looking at options for the company, including a potential sale.

Per the report, Garrett Motion is said to be working with an adviser to consider how to go forward if it decides to go in that direction. The share price of the company jumped about 10 percent on the news, and has since traded in a higher range than it had been, suggesting investors are in a wait-and-see mode to see how it plays out.

That’s a risky move in light of the mixed performance in the third quarter, lowered guidance in several key metrics, and the company not performing in 2022 as well as it had in 2021. For those that got in on the news, the share price could easily go south if it is declared to be a rumor or negotiations don’t lead to a deal.

For those that were already in at a good entry point, it would be worth considering selling the news, now that it’s apparent the potential sale has already been priced in. My main point in bringing up the news of a potential sale is because it reflects the fact the company has cleaned up its balance sheet some, and could be considered a potential target for a company that has the capital to push the company forward.

Macro-economic headwinds

Most investors are aware of the macro-economic headwinds being faced at this time, and could be disproportionately detrimental on a tech company like GTX, which tend to get hammered more from increasing interest rates the end up shrinking margins and earnings.

The company has already mentioned weakness in its product mix, specifically calling out light vehicle gasoline and commercial vehicles. I don’t think this is simply a matter of making some adjustments to improve the performance of the company, but more likely early indicators of growing challenges in the industry.

Add to that the lowering of guidance in several metrics, and it paints a picture of a challenging economic environment that is going to be very difficult for GTX to overcome in 2023.

It has shown to have some pricing power in response to inflation, but we know that is limited to the upside, and will be difficult to replicate as inflation remains high and interest rates continue to be bumped up.

We’ll get a clearer picture of that in the next month or two as to the likely impact on the economy in general, and GTX in particular.

Conclusion

While Garrett Motion Inc. had a decent third quarter, I think it’s going to struggle to maintain momentum. It may manage to repeat its third quarter performance in the fourth quarter, but I consider that a best-case scenario. Any hiccup and the company is going to underperform, and the share price will take a hit.

Looking at the trading range of GTX over the last couple of years and since it emerged from bankruptcy, I see nothing in regard to significant catalysts that could break it out of its tight trading range in any sustainable way.

And with its share price trading more volatile since mid-May 2022, it looks like investors aren’t convinced on how the company perform going forward, I think there’s strong likelihood they’ll bail and drive the share price down on any news or results that confirm weakness for a prolonged period of time.

While I agree with Garrett Motion management that it has been doing fairly well under the existing environment it is operating in, I don’t think it’s enough to break it out of its current trading range. GTX stock and has a much better chance correcting to the downside heading into 2023, than it does of breaking out to the upside.

At best, I see Garrett Motion Inc. continuing to trade as it has been over the last couple of years, and worst, it falling below that level and trading at lower lows and lower highs, with little chance to recover in the near term.