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Why Adient Gained 78.2% in April

By Lou Whiteman - May 3, 2019 at 6:13PM

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Wall Street is warming to the company's turnaround plan.

What happened

Shares of Adient (ADNT -2.11%) had a difficult run in March, the victim of projections that auto parts sales were headed for a decline in 2019. But the company bounced back nicely in April, with its shares gaining 78.2% for the month, according to data provided by S&P Global Market Intelligence.

So what

Adient, a maker of automotive seating and other interior products, was boosted in April by a series of analyst upgrades. Early in the month, Robert W. Baird moved the company from underperform to neutral.

Bank of America Merrill Lynch analyst John Murphy then came to the company's defense on April 12, upgrading the shares to buy from neutral and raising his price target to $25 from $19. Murphy, in an accompanying note, said he believes Adient will soon be able to refinance its debt, alleviating any liquidity concerns and allowing CEO Douglas DelGrosso, who joined the company in October, to execute a turnaround plan.

RBC Capital also upgraded the shares, from underperform to sector perform.

A model of an automotive interior.

Adient's interiors offering for luxury cars. Image source: Adient.

Adient came through with that refinance days later, announcing April 15 it would offer $750 million in secured notes due 2026, with the proceeds from the offering along with other borrowings to be used to prepay and terminate its existing credit facility.

The company also said it expects to generate about $4.1 billion in revenue in its fiscal second quarter, down from $4.6 billion in the same quarter a year prior and just shy of the $4.23 billion analysts are expecting. Free cash flow is also expected to turn positive compared to the same quarter last year, thanks to a reduction in aged receivables, lower capital expenditures, and benefits associated with quarter-close timing differences.

DelGrosso said that the preliminary results "demonstrate that the actions taken to improve the company's operational and financial performance are taking hold." Adient is expected to announce full details of its quarter on May 7.

Now what

Even after the April jump, Adient still ended the quarter down 62% over the past year. Most of the company's longer-term issues have been operational, and not structural, as the previous management team struggled through the launch of a new product line that led to higher labor and freight expenses.

Adient has had a difficult run since it was spun out of Johnson Controls in 2016. The company has a strong share of the global seating market, controlling nearly 40% of the market in North America and Europe and a slightly higher percentage in China, but seating tends to be a price-sensitive component from which it is difficult to extract high margins.

The hope is that over time, DelGrosso will be successful in restructuring Adient and improving its operations. If so, there is room for additional upside: The company today trades at just 0.137 times sales, well below the 0.462 times multiple of seating rival Lear.

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