I have a Buy investment rating for Adient plc's (NYSE:ADNT) stock.
I touched on Adient's "business outlook and capital allocation" in my earlier April 22, 2022 write-up for the stock. In the current update, I focus on ADNT's recently announced fourth quarter financial results and the company's new shareholder capital return initiative.
Adient's new share repurchase program and its better-than-expected Q4 FY 2022 (YE September 30) earnings have prompted me to turn positive about the stock. Therefore, I have raised my investment rating for ADNT's shares from a Hold previously to a Buy now.
Adient announced the company's Q4 FY 2022 earnings last week on November 4, 2022.
Revenue for ADNT expanded by +32% YoY and +5% QoQ to $3,650 million in the final quarter of fiscal 2022. It is worth noting that Adient's actual Q4 FY 2022 top line came in +4% higher than the Wall Street analysts' consensus estimate of $3.52 billion.
The company also turned around from a non-GAAP adjusted net loss per share of -$0.24 in Q4 FY 2021 to generate a positive non-GAAP adjusted earnings per share or EPS of +$0.53 for the recent quarter. Adient's actual fourth quarter adjusted EPS was +2% above expectations, and represented a substantial improvement as compared to its Q3 normalized bottom line of +$0.08 per share.
ADNT's above expectations Q4 FY 2022 financial results suggest that the worst might be over for the company.
Notably, Adient highlighted at its most recent quarterly earnings call that the company's cost pressures have eased to a considerable extent, given that "commodity costs are softening" and "ocean freight costs are trending lower."
At the same time, there has been greater revenue visibility for ADNT, as production disruptions for its clients become less frequent. Specifically, Adient noted at the fourth quarter investor briefing that "customers are continuing to make modest improvements with regard to their operating patterns."
In the company's Q4 FY 2022 financial results media release, Adient revealed that its "board of directors" have given the go-ahead for "a $600M share repurchase program with no expiration." This buyback program is significant, as its value is equivalent to about 16% of ADNT's current market capitalization at approximately $3.6 billion.
I think that ADNT's new share buyback program sends a couple of positive signals about the company.
Firstly, the share buyback program brings attention to Adient's valuations, as share repurchases will only be value-accretive if they are done when the company's stock is undervalued.
According to valuation data taken from S&P Capital IQ, Adient is currently valued by the market at a consensus forward FY 2024 EV/EBITDA multiple of 4.9 times. As a comparison, ADNT's three-year mean forward EV/EBITDA ratio prior to the COVID-19 outbreak in 2022 was higher at around 5.8 times. As such, it is reasonable to conclude that Adient's current valuations are appealing.
Secondly, Adient has made significant headway with respect to the company's deleveraging efforts, why explains why the company is confident in being able to allocate excess capital to shareholder capital return initiatives like buybacks.
At its Q4 FY 2022 earnings briefing, ADNT emphasized that the company is "solidly on track and progressing towards a target leverage threshold of 1.5x to 2.0x net debt to adjusted EBITDA." It is also worth mentioning that Adient has already paid down $1.9 billion worth of debt in the past nine quarters.
Thirdly, ADNT's new share repurchase program also raises hopes about the company's other shareholder capital return initiatives.
Adient has suspended dividend payments since paying out a quarterly dividend per share of $0.275 in August 2018. Assuming that ADNT does resume paying dividends sometime in the future, it could help to attract a new group of income-focused investors which will be a boost to its share price.
ADNT's FY 2023 management guidance was also another bright spot for the company.
Looking ahead, the company is guiding for adjusted EBITDA and free cash flow of $850 million and $200 million, respectively in fiscal 2023 as highlighted in its Q4 FY 2022 earnings press release.
This implies that Adient's adjusted EBITDA is expected to grow by +26% in the current fiscal year (versus $675 million in FY 2022), and this will also exceed its pre-COVID normalized EBITDA of $787 million for FY 2019.
Notably, ADNT's management guidance points to a substantial jump in the company's free cash flow from $47 million in FY 2022 to $200 million for FY 2023. This implies that ADNT has the financial capacity to execute on share repurchases in the current fiscal year. Adient explained at its Q4 FY 2022 investor call that "deleveraging, lower restructuring (expenses) and relatively flat cash taxes" will be the key drivers of the company's higher cash flow in fiscal 2023.
My investment rating for Adient is a Buy. I have turned bullish on ADNT's future prospects after considering the company's above-expectations fourth quarter financial results and its new share repurchase program.