Adient Stock Remains 'Undeniably Cheap' Despite Recent Rally, Barclays Says In Upgrade

Adient PLC ADNT announced preliminary guidance Monday for the second quarter. 

Although the stock experienced a record rally in April, shares remain “undeniably cheap" given the automotive supplier's 2021 earnings power — and could appreciate significantly if investors gain confidence in the company’s turnaround prospects, according to Barclays.

The Analyst

Brian Johnson upgraded Adient from Equal Weight to Overweight and raised the price target from $16 to $30.

The Thesis

Adient’s disclosures on Monday had three main positives, Johnson said in the Tuesday upgrade note. (See his track record here.)

◘ The company announced plans that include a senior debt issuance of $750 million and a Term Loan B of another $750 million to replace the existing Term Loan A, which matures in 2021.

This means the company will have around $300 million in additional gross cash on hand, and these initiatives alleviate concerns around a potential equity offering, the analyst said. 

◘ Adient’s preliminary second quarter results came in better than expected, inspiring increased confidence in management’s projections of improvement through 2019, Johnson said. 

◘ The details around “at risk” and “critical” programs provided by the company indicate that the issues are much smaller than what was feared, he said. 

The disclosure revealed that underwater contract backlogs, which are structurally underpriced, accounted for 30-40 percent of the company’s 2019 revenue, the analyst said. The magnitude of the underpriced contracts was originally expected to be much higher, he said. 

Adient is facing plant inefficiencies, but this is due to the large number of new launches in fiscal 2018, Johnson said. Even if the trend continues in 2019, this will be the trough year, and the issues will begin easing in 2020, he said. 

Price Action

Adient shares were trading up 1.47 percent at $24.08 at the time of publication Tuesday. 

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Photo courtesy of Adient.