The Automotive industry is grappling with the coronavirus outbreak in China and Adient Plc ADNT isn’t immune to this. Amid the macroeconomic headwinds, the company has lowered 2020 guidance. Shares of the Ireland-based automotive seating supplier have plunged 37.7% year to date compared with the industry's decline of 23.2%.
Let’s discuss upon the factors responsible for the dismal price performance and results of the company.
What’s Impacting the Stock?
Auto sales across the globe are declining, which is likely to put pressure on Adient’s sales as the company is heavily dependent on cyclical end-market demand. In fiscal 2019, sales of the company totaled $16.5 billion, down 5.2% year over year. The company expects sales for fiscal 2020 in the range of $15.6-$15.8 billion, which indicates a decline of roughly 5% year over year from the midpoint of the guidance. Sluggish foreign sales and production will continue to affect Adient’s foreign revenue mix. The company’s high leverage is also a concern. Its long-term debt increased to $3,740 million in first-quarter fiscal 2020. Debt-to-capital ratio stands at 68.21%, which restricts the firm’s financial flexibility.
Panic surrounding COVID-19 has triggered Adient to limit business travels in and out of China as well as the Asia-Pacific (APAC) region. Consumer spending in China is also weak amid economic slowdown concerns and trade tensions. Furthermore, passenger-vehicle sales and demand for Adient’s products are bleak. Economic headwinds and industry-specific factors, including GV6 emission standards, are marring passenger-vehicle sales in the region. Lower income from Adient's joint ventures with China suppliers is another concern. Therefore, the company is expected to witness a decline in deliveries in the markets served in China in the days to come.
Per management, the company anticipates 2020 adjusted EBITDA to be dented by the coronavirus outbreak and is expected to track toward the lower end of the outlook of $870-$910 million. Equity income is anticipated between $175 million and $185 million compared with the prior guidance of $235-$245 million. Meanwhile, operational improvements in Americas and Europe, the Middle East and Africa (EMEA) are likely to continue this year, partially negating the $70-million headwind in China.
Adient has been gaining customers with its broad range of products in the seating business. A diverse customer base and regional presence helped the company to create strong market position. Recent awarded programs include a great mix of truck, SUV and luxury platforms. Given the customer, geographic and platform mix of these as well as other recent business awards, we expect the company’s leading market positions to strengthen in the upcoming years.
Adient’s strategic acquisitions and divestitures bode well. In January 2020, the company divested its Recaro seating business that specializes in premium aftermarket seating solutions. It also sold its 30% ownership stake in Yanfeng Automotive Trim Systems (YFAI) to joint venture partner Yanfeng. The transaction generated $379 million, which will be used to clear off debt.
Measures to improve Adient’s operating and financial performance are paying off, with reduction in total costs. Additionally, the company is evaluating options to refinance the existing credit facilities that will provide support and longer-term financial flexibility to manage through the turnaround.
The company is continuing with its efforts to stabilize the business anticipates considerable improvement through the rest of the year. The company is undertaking initiatives to stabilize and improve launch performance, such as ensuring adequate on-time staffing, focusing on change management, enhancing readiness and program reviews as well as remedying potential issues efficiently.
Zacks Rank & Other Stocks to Consider
Adient currently carries a Zacks Rank #2 (Buy).
Few other top-ranked stocks in the same sector are Fox Factory Holding Corp. FOXF, Blue Bird Corporation BLBD and Polaris Industries PII. While Fox Factory sports a Zacks Rank #1 (Strong Buy), Blue Bird and Polaris carry a Zacks Rank of 2 at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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