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The following segment was excerpted from this fund letter.
Garrett Motion (NASDAQ:GTX)
GTX had positive news during the year and was a significant contributor to our overall gains. GTX announced a substantial one-time preferred dividend along with the conversion of the preferred shares, which we primarily owned, while simultaneously repurchasing roughly a quarter of the overall shares outstanding from the controlling shareholders. I view both events favorably and we retain a large position.
I have written on GTX many times previously, and I will not bore partners with a rehash. Instead, I want to focus on the significant slowdown in battery electric vehicles (BEV) growth.
Source: Wolfe’s BEV Growth Forecast
The slowdown I have long predicted is materializing, and I believe the “stronger for longer” tail of internal combustion engines (‘ICE’) and hybrid power trains, which account for ~60% of the company’s EBITDA, has materially increased in value. Despite this, GTX currently trades ~5x my 2024 FCF and I believe GTX will return at least half to shareholders via buybacks. Simply put, I believe the slowdown in BEV is heading on a collision course with GTX’s valuation and proper capital allocation. Without a significant reacceleration in BEV sales, it is difficult to see how GTX will not be a significant winner eventually. However, rather than rehash all the puts and takes of the bull versus bear debate, I want to update our risk/reward framework over the next three years.
To the downside, if BEV unit growth reaccelerates towards a mid-30s growth rate, I believe GTX’s EBITDA could be roughly flat in 2027 as continued share gains in existing ICE and hybrid powertrains and a modest cyclical recovery offset the mix lost to BEVs. Importantly, I believe GTX would generate roughly $1.2B in FCF in that time, with half going to buybacks and half to debt paydown. Depending upon assumptions for what price the shares are repurchased, a punitive 4x EV/(EBITDA-capex) multiple would yield a stock price roughly flat to up slightly from current levels.
To the upside, if BEVs were to continue decelerating, I estimate GTX’s 2027 EBITDA could be 25% larger than at present and EPS could reach $3. Further, in a world where BEV penetration is plateauing, hybrid powertrains requiring GTX’s state-of-the-art turbos would play a critical role in decarbonizing transportation. For instance, MIT estimates the savings from switching from internal combustion to hybrid results in a ~50% reduction in CO2 versus a 65% reduction from BEVs. If GTX were to trade 12x earnings, roughly the standard auto supplier multiple before the 2020 recession, shares would trade $36 versus $9 today.
While I am acutely aware government mandates, continued BEV innovation, and falling battery prices could boost BEV demand, I believe GTX is an opportunity where we stand to lose little if wrong while making a great deal if proven right.
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This presentation is not an offer to sell securities of any investment fund or a solicitation of offers to buy any such securities. Securities of McIntyre Partnerships, LP (the ” Fund” or ” McIntyre Partnerships“) managed by McIntyre Capital Management, LP (the ” Investment Manager” or ” McIntyre Capital“) are offered to selected investors only by means of a complete offering memorandum and related subscription materials which contain significant additional information about the terms of an investment in the Fund (such documents, the ” Offering Documents“). Any decision to invest must be based solely upon the information set forth in the Offering documents, regardless of any information investors may have been otherwise furnished, including this presentation. An investment in any strategy, including the strategy described herein, involves a high degree of risk. There is no guarantee that the investment objective will be achieved. Past performance of these strategies is not necessarily indicative of future results. There is the possibility of loss and all investment involves risk including the loss of principal. Securities of the Fund are not registered with any regulatory authority, are offered pursuant to exemptions from such registration, and are subject to significant restrictions. The information in this presentation was prepared by McIntyre Capital GP, LLC, the general partner of the Fund (the ” General Partner“), and is believed by the General Partner to be reliable and has been obtained from public sources believed to be reliable. General Partner makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this presentation constitute the current judgment of General Partner and are subject to change without notice. Any projections, forecasts and estimates contained in this presentation are necessarily speculative in nature and are based upon certain assumptions. It can be expected that some or all of such assumptions will not materialize or will vary significantly from actual results. Accordingly, any projections are only estimates and actual results will differ and may vary substantially from the projections or estimates shown. This presentation is not intended as a recommendation to purchase or sell any commodity or security. The General Partner has no obligation to update, modify or amend this presentation or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. This presentation is strictly confidential and may not be reproduced or redistributed in whole or in part nor may its contents be disclosed to any other person without the express consent of the General Partner. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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