Garrett Motion Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Garrett Motion Inc. is a leading provider of differentiated turbocharger technologies used by nearly every major automotive and commercial vehicle original equipment manufacturer (“OEM”).

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Garrett Motion is a global technology leader, specializing in turbocharger technologies for light and commercial vehicles. Turbochargers are devices that increase an engine’s power output and efficiency by forcing more air into the combustion chamber.

  • Revenue Distribution: The company generates revenue primarily through the sale of turbochargers to OEMs for use in new vehicles (original equipment) and to the aftermarket for replacement parts. Their main customers include major automakers like Stellantis, General Motors, Ford, and VW, along with many others. The revenues distribution can be broken down into:

    • Light vehicles
    • Commercial vehicles
    • Aftermarket

  • Industry Trends: The automotive industry is undergoing significant transformation, driven by factors such as increasing demand for fuel efficiency, stricter emissions regulations, and the growing adoption of electric vehicles. While electric vehicles pose a long-term threat to turbocharger demand, Garrett Motion is adapting by developing electric turbochargers and other technologies for hybrid vehicles. The trends include:

    • Stricter Emission Norms: Governments are tightening regulations on vehicle emissions, pushing automakers to adopt fuel-efficient technologies like turbochargers.
    • Electrification: Hybrid and electric vehicles are gaining market share, creating both challenges and opportunities for Garrett.
    • Downsizing and Boosting: Automakers are increasingly downsizing engines and using turbochargers to maintain power output while improving fuel economy.
    • Shift to Electrification: While Electric vehicles continue to grow and have gained considerable market share, it poses a challenge for ICE engine vehicles

  • Margins: Garrett Motion operates in a competitive industry with significant cost pressures. The company’s profitability is influenced by factors such as raw material prices, manufacturing efficiency, and pricing pressures from OEMs. In 2023, Garrett Motion noted margin expansion driven by volume growth, pricing actions, and cost productivity initiatives. Despite inflationary pressures, these actions have led to growth in operating margins.

  • Competitive Landscape: The turbocharger market is relatively concentrated, with a few major players including Garrett Motion, BorgWarner, and IHI Corporation. Competitive factors include technology leadership, product quality, cost competitiveness, and relationships with OEMs.

  • Differentiation: Garrett Motion differentiates itself through its long history of innovation, strong relationships with OEMs, and global manufacturing footprint. The company invests heavily in research and development to develop new and improved turbocharger technologies, as well as electric turbochargers and other electrification solutions. They are developing E-turbos for hybrid vehicles to comply with the ICE engine standards.

Financials In-Depth

Recent Financial Performance (Garrett Motion’s Q1 2024 Results):

  • Sales: For the three months ended March 31, 2024, Garrett Motion reported sales of $960 million, representing an increase of 5.7% from $908 million in the same period last year.
  • Net Income: Net income was $46 million for Q1 2024, a 13.3% increase compared to $41 million in Q1 2023.
  • Adjusted EBITDA: Adjusted EBITDA, a key metric for assessing profitability, was $160 million in Q1 2024 compared to $119 million in Q1 2023.
  • Cash Flow: Reported operating cash flow was -$33 Million compared to $50 million in the prior year
  • Guidance: For the full year 2024, the company expects net sales growth in the range of 3% to 6% and adjusted EBITDA between $665 million and $715 million.
  • Market Share: Continued growth in its end markets helped drive growth of the total outstanding value of the company.

Balance Sheet Strength:

  • Garrett Motion’s balance sheet carries a notable amount of long-term debt, but this debt has been substantially reduced following their emergence from chapter 11. Their plan to return 75 million to shareholders by 2027 is a good sign that the company’s finances and free cash flows are in a healthy range.

Understandability:

  • I am giving GTX a 3/5 because while the basic concept of turbochargers and supplying to OEMs is straightforward, understanding the underlying technology, market dynamics, and accounting intricacies requires a bit more digging.

Moat Analysis

  • Overall Moat Rating: 2 / 5 (Weak)

  • Justification:

    • Switching Costs (Low): Automakers may face some engineering costs in switching turbocharger suppliers, but these costs are generally not prohibitive. OEMs can and do switch suppliers based on price, performance, and technology.
    • Intangible Assets (Moderate): Garrett has a well-established brand name and a history of innovation, which provides some competitive advantage. However, the company’s patents have a limited lifespan and can be challenged, and other companies can develop competing technologies.
    • Cost Advantages (Weak): Garrett benefits from its scale and global manufacturing footprint, which provides some cost advantages. However, other major players in the turbocharger market have similar scale and cost structures, so this advantage is not significant.
    • Network Effects (None): Network effects do not play a significant role in the turbocharger market.
  • The Little Book that Builds Wealth by Pat Dorsey, the book mentioned earlier states that an economic moat should show these traits in terms of: Intangible Assets, Customer Switching Costs, Network Effect, Cost Advantages. GTX doesn’t show these traits.
  • Overall, Garrett Motion’s moat is relatively weak. The company faces significant competition and cost pressures, and its competitive advantages are not particularly strong or durable. While they can retain customers based on their ability to provide the right technology for ICE engines and now also hybrid, a lot will depend on the company being able to pivot towards EV technologies.

Risks to the Moat and Business Resilience

  • Technological Disruption: The biggest risk to Garrett Motion’s moat is the ongoing shift to electric vehicles, which do not require turbochargers. While Garrett Motion is investing in electric turbochargers and other electrification technologies, it faces significant competition in this area and may not be able to successfully transition its business.
  • Customer Concentration: Garrett Motion relies on a relatively small number of large OEM customers, which increases its vulnerability to losing business to competitors.
  • Commoditization: The turbocharger market is becoming increasingly commoditized, which puts pressure on prices and margins.
  • Raw Material Prices: Garrett Motion’s profitability is sensitive to fluctuations in raw material prices, particularly steel and aluminum.
  • **The company had to write off the cost to make the turbines used by Ukrainian aircraft engines and may never recover that. These events have not had a considerable impact on company earnings, operations or financial conditions, but the war with Russia continues and that may lead to serious implications or other operational changes.