Adient

Adient's fiscal third-quarter adjusted EBITDA fell by $1 million year over year while EBITDA margin declined 30 basis points to 5.7%. Higher chemical and freight costs from the Iran war and automaker production problems cost Adient $32 million of EBITDA.

Why it matters: Adjusting for the $32 million, adjusted EBIT margin would have been 50 basis points higher year over year. Operational efficiencies—what Adient calls business performance—still contributed $9 million of EBITDA tailwind despite the $32 million headwind. This improvement shows management is doing a good job controlling what it can control. The company also increased fiscal 2026 revenue guidance to about $15 billion from about $14.8 billion on higher production and, to a lesser extent, foreign exchange. Free cash flow for the quarter rose 20% on favorable working capital timing, but this will be about a $45 million headwind in the fiscal fourth quarter. A bit less than $20 million of the $32 million EBITDA headwind should be recovered from customers over the next few quarters via pass-throughs.

The bottom line: We maintain our Narrow Morningstar Economic Moat Rating for Adient, but we are lowering our fair value estimate to $64 per share from $69. The change is from reducing our midcycle EBIT margin excluding equity income to 5.3% from 5.8% to account for more downside cyclicality risk in the auto industry. We still consider Adient's stock to be very undervalued. We expect EBIT margin expansion over time as unprofitable metal contracts roll off the books, including about $90 million of that business in fiscal 2027 and a slightly higher amount in fiscal 2028 per management. We like that Adient is buying back its cheap stock while its turnaround progresses. Fiscal third-quarter repurchases totaled $30 million, and the company said in its earnings deck that it expects the board will increase the authorization before fiscal fourth-quarter results are reported.

We are lowering our fair value estimate to $64 per share from $69. The change reflects reducing our midcycle EBIT margin excluding equity income to 5.3% from 5.8% to account for more downside cyclicality risk in the auto industry. Our weighted average cost of capital remains 9.3%. Management does not expect much help from industry volume over the next few years, which is not an unreasonable assumption due to tariffs and consumers struggling with vehicle affordability. We model a small revenue decline in fiscal 2027 as some undesirable metal business rolls off and then about 1.0%-2.0% annual growth starting in fiscal 2028. Our fiscal 2028 EBITDA margin excluding equity income is in line with management's target of a 200-basis-point expansion over fiscal 2024 levels of 5.4%. We model average adjusted operating margin excluding equity income over our five-year explicit forecast at 4.6% (down from 4.7%) to reflect continued operational improvement versus recent levels. We model compound annual revenue growth of about 1.5%. Our midcycle operating margin before equity income of 5.3% is below rival Lear's seating segment operating margin of typically 6%-8% (closer to 6% since 2021), so upside potential exists for our valuation should Adient start to match or exceed Lear's metrics.

We expect Adient to eventually reach an adjusted EBITDA margin excluding equity income of as much as 8.0%, though management in August 2024 projected 7.5%-8.0% and said around 7.0%-7.5% in November 2025. We model about 7.5% in fiscal 2028 and about 8.0% in fiscal 2029. Fiscal 2025’s metric was 5.6%, up from 3% in fiscal 2019, and up 20 basis points from fiscal 2024. The improvement to the 8% range will come from three main buckets. First is continued volume increases over time, and second is a gradual reduction in what management has called sticky costs, such as freight as well as labor and commodity cost customer recoveries. The final bucket is the roll-off of unfavorable vehicle programs ending in 2026 and the expiration of undesirable metals business contracts at the end of fiscal 2026-28. We also see China as a good opportunity for Adient’s margin as it has about 20% passenger-vehicle market share there and management intends to grow with Chinese automaker customers as those firms grow and add more seating content via more EVs and SUVs. Management expects Adient China’s volume (including unconsolidated business) compound annual growth rate to be double the Chinese industry rate and soon be 70% weighted to Chinese automakers, up from about 40% in fiscal 2024 and mid-40s in fiscal 2025. Before the China JV sale in 2021, roughly 80% of Adient's Chinese seating volume came from non-Chinese automakers.

We think recent chip shortage production cuts, input cost pressures (recently abating), and tariff uncertainty have held Adient's stock down and masked efficiency improvements, so investors will need to be patient. We believe Adient is a multiyear turnaround story, but one that is playing out positively.

We model over 200 basis points of operating margin improvement over our five-year explicit forecast period. Adient has greater scale opportunities than its competitors due to its larger seating scale and its current, though improving, inefficient manufacturing. Improvements will come over time from cost-cutting, particularly via moving metals production to low-cost countries from high-cost European locations, exiting unfavorable business, reducing its scrappage and premium freight charges, and lower selling, general, and administrative and engineering expenses.

We model equity income of about $70 million in fiscal 2026, growing to about $82 million in fiscal 2030. Eliminating equity income from our model would reduce our fair value estimate by 19% to $52. We model a low $300 million figure annually for capital expenditure based on guidance.

Adient has a narrow moat thanks to advantages in three areas of our moat framework: intangible assets, cost advantage, and switching costs. We see Adient’s moat sources as interrelated. Seating is an oligopolistic sector with only Lear competing with Adient on a true global level, helping Adient obtain scale. Faurecia, part of Forvia, does well in Europe and has recently been expanding in North America, while Magna’s seating is primarily North America-focused and Boshoku is a keiretsu player in the Japanese market with significant ownership by Toyota. We do not see this oligopolistic dynamic changing via a new player such as a low-cost upstart from Asia. Automakers do not pick suppliers for key parts such as seating purely on price. Reliability and the ability to service an automaker across its global factories via just-in time manufacturing are key factors, and not many suppliers can do that, as evidenced by the top four firms holding about three-fourths of the global seating market.

Seating is not a commodified business. It takes patents, decades of trust built up with customers, and an ability to service a customer all over the world with just-in-time manufacturing. This consistent reliability is not something that just anyone who can get a loan to start a seating company could do easily or quickly. Automakers' move to more global platforms is very good news for Adient since a supplier must be able to service the OEM consistently all over the world. A regional player cannot do this, and we think a small firm would be hesitant to borrow lots of money to add new facilities and overhead all over the world without any guarantee of winning new business. Automakers want the same supplier on a program all over the world due to scale benefits for them and reliability with a vendor that knows the vehicle program. We see seating as a sector likely to remain best served by a limited number of firms for a long time to come.

Adient’s expertise has won it many awards, both from customers such as GM and Toyota for supplier of the year (2026 brought its fifth straight GM supplier of the year award) for design and for highest seat quality from JD Power. It takes trust from customers to even get on a vehicle program; then suppliers can keep the business with their technical expertise with technologies such as weight reduction via materials expertise in steel composites as well as using new materials such as magnesium or aluminum. Seating and interiors also matter for safety and heavily influence the overall appeal of the vehicle to a consumer. Longtime seating firms such as Adient have decades of knowledge of what automakers and consumers want in a seat or interior, a helpful intangible asset in keeping new entrants out.

Once the supplier is on a program, it will be asked to develop seats for a new-generation vehicle program sometimes years in advance. This planning means the supplier gets into planning a vehicle early enough to offer the best design and integration into the vehicle’s floor so as to reduce weight while also lining up its own supply chain to offer the best cost savings to the OEM. This integration and ability to offer an improved product at a good price makes for a sticky relationship with a customer, creating a barrier to entry not only for the current vehicle program but for future programs as well. Once a supplier has the business, it is extremely rare to lose it, especially during a vehicle program, because automakers then have to remove tooling from the supplier which can cost millions. An automaker would also have to incur expensive validation testing of a new supplier, all while the production line is not making any vehicles and decimating an automaker’s ability to recoup its fixed costs. A November 2019 Adient investor presentation said its win rate on business where it is the incumbent supplier is 96% in the Americas, 90% in Europe, the Middle East and Africa, and 100% in China and a May earnings call said it was 98% globally in the first half of fiscal 2022.

Seating is not a new type of part and is a comfortable oligopoly for the incumbent players, of which Adient is the market leader. We feel that Adient’s leading position in seating positions it well with new OEM entrants, such as electric vehicle startups, Chinese EV makers, and possible new markets, such as autonomous vehicles made by Silicon Valley firms and by incumbent automakers. We see the interior being very important to consumer appeal in an autonomous driving world since we expect the interior will be radically different over time. Adient is well positioned to remain a leader in seating as the market gradually shifts to autonomous vehicles in the very long term, further justifying its moat. Some customers use component sourcing which means the existing seating players must know how to work and sell to one another in addition to the automakers. For example, an Adient seat system could have a Lear frame or vice versa. This directed sourcing by automakers means the automakers are not going to be eager to add a new supplier into a seating supply chain that already has many top operators that already know how to work together.

The stickiness of the relationship with the automaker and Adient’s ability to innovate also help cost advantage by protecting Adient from the relentless annual pricing reductions automakers expect from suppliers, since automakers will be willing to pay up for new technology. Seating is also a less capital-intensive business than other areas of the automotive supply world. Adient’s capital expenditure as a percentage of sales is one of the lowest in our supplier coverage.

Legacy contracts that continue to weigh down profitability will reset to more favorable terms or go away starting in fiscal 2026 and continue to roll off in fiscal 2027 and fiscal 2028.

Seating is a very sticky part of the automotive supplier space. Once a supplier is on a vehicle program, it tends to win the contract for the next generation of that vehicle program nearly 100% of the time.

Adient's focus on consolidated structures in China could yield growth from automakers that it could not aggressively pursue when China was mostly joint ventures.

Despite its leading position, Adient still operates in a very cyclical industry, and its stock will probably at times be sold off too severely for macroeconomic reasons. It's also in the midst of a multiyear turnaround effort.

Some automakers are taking seating in-house, though using Adient parts.

The threat of overcapacity is always present, especially since Adient must build with its customers to support just-in-time manufacturing. Industry volume will likely be roughly flat for some time.