Since I just had a baby, it’s been difficult to find time to sit and write an extensive article. I’ll write some quick review on why I am long Garrett Motion Inc. (GTX: NYSE) and have kept adding the positions aggressively as the stock price dropped. (Pardon me if I make some errors as I am writing this on IPad and writing some contents top off my head)
(1) Garrett manufactures turbocharger which boosts the fuel efficiency of vehicles. Turbocharger requires unique technology and Garrett and Turbochargers are especially essential in hybrid cars. The numbers of hybrid cars are expected to increase dramatically (from 1% now to 35% share globally by 2030, according to JP Morgan estimate) as the environmental standards get tougher across the globe. In a sense, even if the overall automobile sales was cut in half, the hybrid sales still could go up over 10 times in the next decade or so.
(2) Garrett is launching new e-turbo products in 2021. The mid-term growth can be reasonably be expected.
(3) Garrett has some products dedicated to FCV (Fuel cell vehicle).. Although BEV (Battery Electric Vehicle) has been the market’s focus now, China has notified its limitations and has set its eye on FCV adoption by targeting to build 1,000 hydrogen re-fuelling station by 2030 across the country. If the “chicken or egg” problem on FCV can be solved starting in China, it could take off globally thereafter.
(4) The business has a negative working capital, which means it can generate more and more operating cash flow as it grows.
Garrett estimates about $600Mil EBITDA x 50% free cash flow conversion (before MTT and Asbesto payment) = $300Mil adjusted levered Free Cash Flow. MTT payment will be fully paid in 8 years and Asbesto liabilities should drop eventuall (may disappear in 10-15 years?). The turbocharger market is expect to double in a next decade or so (8% CAGR.)
Doing a simple math: $300Mil FCF x 2 = $600Mil
Garrett could become a business with $600Mil FCF in a next decade but the market cap is only about $750Mil now. That’s a insane value play in my opinion. The company is loaded with debt so it comes with high risk but the potential return is exponential. Call me crazy but I think Garrett could become a ten bagger stock in long term if things go as I expect.