We came across a bullish thesis on Garrett Motion Inc. (GTX) on Value Investing by Double Alpha Factory’s Substack by Maksim. In this article, we will summarize the bulls’ thesis on GTX. Garrett Motion Inc. (GTX)'s share was trading at $7.34 as of Nov 4th. GTX’s trailing and forward P/E were 6.02 and 5.95 respectively according to Yahoo Finance.
A close up of an engine piston with a commercial turbocharger attached.
Garrett Motion (GTX) operates as a key player in the mobility and industrial technology sector, focusing on high-performance turbocharging solutions for light vehicles, commercial vehicles, and industrial applications. Known for its mechanical and electrical turbo products, GTX caters to a broad spectrum of vehicle types, including gasoline, diesel, and natural gas engines, with some revenue now coming from its E-Boosting and hydrogen fuel cell compression solutions. As of 2023, GTX leads in turbochargers for internal combustion engines (ICEs), a critical technology that enables automakers to meet fuel efficiency and emission standards without sacrificing power or performance. This niche, heavily dominated by Garrett Motion and BorgWarner, has a high barrier to entry due to the technical complexity involved. Additionally, a significant portion of GTX's revenue is secured years in advance, with more than 80% of OEM sales planned four years ahead, providing solid visibility into future cash flows.
Despite the auto industry's shift towards battery electric vehicles (BEVs), GTX’s turbo business remains resilient, with turbocharger penetration expected to exceed 50% in ICE-based vehicles through 2030. As BEV adoption has slowed due to infrastructure, cost, and consumer preference challenges, hybrids—where turbo penetration is even higher—are likely to account for a larger portion of future vehicles. This benefits GTX, as hybrids require more advanced turbo systems, which offer higher margins. Moreover, GTX’s commercial and industrial applications, such as backup power generators and marine engines, represent a significant growth area, accounting for about 30% of total sales and offering higher profitability than light vehicle applications. This segment continues to expand, especially in sectors like marine and backup power, where demand is surging due to their role in ensuring stable power for critical infrastructure, such as data centers. CEO commentary from recent earnings calls reflects GTX's confidence in the durability of its turbo business, which caters to both diesel and natural gas engines for high-demand applications like locomotives and off-highway vehicles.
In terms of financials, GTX projects substantial free cash flow (FCF) generation over the next five years. Management estimates between $1.7 billion to $2.1 billion in FCF, with the lower end of this forecast still translating to a FCF yield of approximately 20% based on its current market capitalization of around $1.6-$1.7 billion. This robust FCF, along with GTX’s forward sales visibility, makes it likely that the company could repurchase its entire outstanding share base within five years, even after allocating around $0.5 billion toward new zero-emission technologies. Given the current 41% BEV penetration assumption in these projections—an aggressive forecast—GTX’s outlook could improve further if BEV adoption rates continue to lag. The slow pace of the BEV transition, noted at the 2024 J.P. Morgan Automotive Conference, reinforces the durability of GTX's revenue base, as the turbocharger market retains a long tail of demand. Recent discussions, including those from major industry events and political forums, highlight various challenges facing BEV adoption, such as prohibitive costs, consumer hesitancy, and infrastructure inadequacies. In Europe, for example, the ambitious goal to ban non-BEV vehicles by 2035 faces substantial resistance, with auto executives and government officials questioning the feasibility of such rapid changes.
In the U.S., adoption rates for BEVs are likewise decelerating, as indicated by recent regulatory shifts to ease tailpipe standards. The Biden administration, for instance, reduced its BEV adoption targets amid political and industry feedback. Meanwhile, automakers are doubling down on hybrids, which offer a balance between emission reduction and operational efficiency. Companies like Ford and General Motors are pivoting to hybrids due to profitability concerns, reinforcing GTX’s position in the evolving vehicle mix. In China, EV manufacturers are increasingly exploring hybrid technologies, acknowledging the profitability and flexibility advantages of hybrid systems over pure BEVs. Garrett's sustained focus on hybrids and ICE solutions aligns well with these market shifts, positioning it as a critical supplier for automakers facing stringent efficiency mandates but limited by BEV scalability issues.
From an investment perspective, Garrett Motion's (GTX) valuation is attractive, trading at a discount relative to its cash flow potential. With a market cap of approximately $1.6 to $1.7 billion, GTX is projected to generate $1.7 billion in free cash flow (FCF) over the next five years. This cash flow can be utilized for substantial stock buybacks, potentially enhancing shareholder value and driving the stock price higher. The company’s diverse revenue streams, particularly in expanding commercial and industrial applications, provide resilience amid uncertainties in the transition to battery electric vehicles (BEVs).
In a worst-case scenario, investors can anticipate a 20% return over the next five years, followed by a 10% return in subsequent years, indicating a solid margin of safety. Comparatively, GTX's closest competitor, BorgWarner, trades at free cash flow yields of around 8-10%, about half of GTX’s yield. This difference implies a potential upside of 50-100% for GTX if the market aligns its valuation with that of BorgWarner.
The investment thesis is based on GTX's strong market position, ongoing demand for internal combustion engines (ICE) and hybrid vehicles, clear revenue visibility, diversification into high-margin industrial applications, and robust free cash flow generation. Collectively, these factors underscore GTX's status as an undervalued entity with significant upside potential, particularly if the transition to BEVs is slower than anticipated.
Garrett Motion Inc. (GTX) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 32 hedge fund portfolios held GTX at the end of the second quarter which was 35 in the previous quarter. While we acknowledge the risk and potential of GTX as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GTX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.