Shares of automotive seating and interiors company Adient (ADNT -3.10%) fell 33.3% in March, according to data provided by S&P Global Market Intelligence. The decline marked another weak month for the company and the auto suppliers industry -- for reference, the stock is down nearly 75% in the last year, having been hammered in the general market malaise in December and again following a disappointing earnings report in February.
Simply put, the fortunes of an auto original equipment manufacturer (OEM) supplier are always going to be largely tied to global light-vehicle sales and production. Unfortunately, the near-term outlook for the automotive industry continues to deteriorate.
For example, a slew of companies with automotive exposure have cut their outlooks for the industry already in 2019. From automation company Rockwell Automation to automotive supplier BorgWarner and multi-industry industrial 3M, the automotive industry is seen as weakening.
Indeed, in mid-March, credit rating agency Moody's cut its 2019 global unit sales growth forecast to 0.5% from a previous expectation of a 1.2% increase. Moody's now expects earnings before interest, taxation, and amortization for North American auto parts suppliers to decline 4.4% in 2019 and then increase only 0%-1% in 2020 -- not a great outlook for Adient.
This is particularly concerning for a company like Adient for two reasons.
First, its relatively low gross margin and high fixed costs mean any disappointment in sales will lead to a disproportionate fall in profit. For example, sales only dipped 1% in the first quarter of 2019 but gross profit tumbled 10.4% to just $180 million.
Second, Adient is a company with a market cap of just $1.5 billion but net debt of around $3 billion. Based on the last 12 months' adjusted earnings before interest, taxation, depreciation, and amortization (EBITDA) of around $1.1 billion, its net debt-to-EBITDA multiple stands at 2.72 times. For reference, a multiple of about 2.5 times is typically seen as suitable for investment-grade debt by rating agencies.
Of course, nearly every stock has its price, and there's no shortage of value investors looking for an oversold situation in the marketplace. Indeed, at the time of this writing, Adient stock is already up more than 25% in April on the back of an analyst upgrade and a better-than-expected earnings report from a peer.
That said, the outlook is far from clear at this stage. What's needed now is some stabilization in the outlook for global light-vehicle sales and production, and Adient will then be able to fully convince investors that it can meet analyst earnings expectations for 2019.