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Adient Aided by Turnaround Plans Amid Industry Headwinds

Zacks Equity Research

Adient plc’s ADNT shares have rallied 31% so far this year, outperforming the industry’s growth of 12.8%. The company, which was spun out of Johnson Controls International JCI in 2016, has been performing well on the back of restructuring efforts. However, this Zacks Rank #3 (Hold) firm is challenged by certain macroeconomic headwinds that are keeping investors on the sidelines. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s delve deeper.

Adient has been gaining customers with a broad range of products in the seating business. A diverse customer base and regional presence helped the company to create a strong market position. Recently awarded programs include a great mix of truck, SUV and luxury platforms. Given customer and geographic mix, platform mix of these and other recent business awards, we expect the company’s leading market position to be further strengthened in the coming years.

Its continued efforts to stabilize the business are expected to result in considerable improvement through the rest of the year. Adient is executing well on its plan to stabilize and improve launch performance, such as ensuring adequate on-time staffing, increasing focus on change management, enhancing readiness and program reviews, and early escalation of potential issues. 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.

Measures to improve Adient’s operating and financial performance are paying off, with more improvements expected in the second half of 2019. The company is committed to a restructuring plan, which is expected to be completed in fiscal 2019. Notably, its successful debt refinancing is likely to generate pro-forma liquidity of $2.1 billion.

While the company is riding on such positives, there are certain hurdles in its path.

Challenging macroeconomic conditions are weighing on the auto seat supplier. Escalating U.S.-Sino trade tensions have softened consumer spending in China, resulting in lower vehicle production. Economic headwinds and industry-specific factors including GV6 emission standards are resulting in a decline in passenger vehicle sales of the country. Resultantly, the company witnessed a decline in deliveries in markets served in China. The trade tiff, which is not expected to wane soon, is expected to hamper Adient’s sales in the remainder of the year. Operational headwinds in American and European segments are also likely to adversely impact the firm.

High tariff-related costs and weaker foreign currencies compared with the U.S. dollar are likely to affect Adient in fiscal 2019. Worryingly, revenues decreased to $275 million in third-quarter fiscal 2019. The negative impact of currency movements, primarily in Europe, accounted for more than half of the decline in revenues. This will further hamper its gross profit in fiscal 2019.

Meanwhile, some better-ranked stocks in the same industry are BRP Inc. DOOO and Veoneer, Inc. VNE. While BRP carries a Zacks Rank #1 (Strong Buy), Veoneer holds a Zacks Rank #2 (Buy).

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