Adient Earnings: Third-Quarter Outlook Leads to a Sharp Downward Reset in Market Expectations

Adient’s ADNT fiscal 2023 second-quarter adjusted diluted EPS of $0.32 missed the Refinitiv consensus of $0.43. On the fiscal first-quarter call, management said to expect second-quarter adjusted EBITDA to decline from first quarter’s $212 million, but the actual figure came in at $215 million, including a one-time $8 million insurance recovery, with margin up 100 basis points year over year to 5.5%. On the May 3 call, management said to expect third-quarter adjusted EBITDA to be about flat with second quarter excluding the insurance benefit. Looking at Refinitiv EPS for fiscal third and fourth quarters, it appears the market was expecting sequential EPS growth in the second half of fiscal 2023. This growth is now not likely to happen, at least not for third quarter, so we think that, along with perhaps fiscal 2023 adjusted EBITDA guidance unchanged rather than increased, explains Adient stock’s May 3 decline. We see no reason to change our fair value estimate, however, because we believe continued cost reduction actions and eventually improving macroeconomic conditions will enable Adient to at least reach profitability parity with rival Lear’s seating business, as has always been Adient’s plan. Still, we may reduce our fiscal 2023 EPS estimate by at least about 30%.

Good news came from more stability in customer orders as supply chain problems slowly improved, enabling a 12% revenue increase from fiscal 2022′s first quarter with $519 million from incremental volume and mix negating a $113 million foreign exchange headwind. Segment revenue roughly performed in line with industry light-vehicle production except in Asia where Adient drastically outperformed in both China and the rest of Asia. Management remains concerned about soft Chinese demand in the back half of fiscal 2023, which, along with elevated North American steel costs, kept guidance unchanged.