Fishtown Capital

Shall we contribute to top ideas for 2025? Recap*: 2023: $AER AerCap Holdings +27%, +29%; +66% total $BRK.B Berkshire Hathaway +15%, +27%; +46% total 2024: $LSXMK Liberty SiriusXM (as-converted into $SIRI) -35% decline (work in progress, potential value trap) 2025: $GTX Garrett Motion Inc Garrett is a differentiated automotive supplier that engineers and manufacturers turbochargers for engines in light and commercial vehicles and other industrial applications (including datacenter backup generators). It is the #1 supplier of light vehicle turbochargers and operates in an oligopoly market structure. New market entrants are unlikely, Garrett continues to gain market share and turbo penetration continues to grow. $GTX price is $8.96 per share. Market cap ~$1.8 billion. Enterprise Value ~$3.3 billion. Garrett is a well-managed, cash generative business trading at a discounted valuation. It is taking advantage of its high cash flow and discounted valuation through consistent, accretive share repurchases. Products: Valuation: 5.5x EV / Adj. EBITDA (‘24E mid-point) 5.8x Adj. Free Cash Flow (FCF) / Market Cap (~18% FCF yield) 7.8x P/E (trailing) Garrett expects to generate "adjusted" free cash flow (FCF) that is greater than it’s current market cap in next 5 years. It has recently instituted a dividend of $0.06 per quarter (2.7% yield) and a Policy to return 75%+ of its FCF to shareholders through share repurchases and dividends. Expected return: Without assuming any multiple re-rating, Garrett shareholders could reasonably expect to earn its current FCF Yield (ie. high teens or ~18%) per annum. It's simple FCF yield is compounded by the stock buyback ("reinvestment"). Delivering revenue growth could be supportive of modest margin expansion, but the vagaries of business (more R&D, restructuring or other unanticipated expenses) may offset modest gains. Evidence of sustainable, positive growth in revenues could both grow FCF and support a higher multiple. An 8x EV multiple would do wonders for the stock, but strong fundamentals would be required to change the narrative and earn a re-rating. Outlook for 2025 LV auto sales and EURUSD exchange rate are both near-term headwinds to delivering top- or bottom-line growth, but this is a medium-term thesis. Projections from 2023 Technology and investor day: Growth in turbocharged gasoline engines is offsetting declines in diesel vehicles. Nearly all hybrid and PHEV (plug-in-hybrid) vehicles incorporate a turbocharger to reduce engine size and increase fuel efficiency. Fully battery electric vehicles (BEVs or EVs like Tesla's or the $F-150 Lightning) do not have a combustion engine and therefore have no turbocharger. Revenue: Garrett has a roadmap to continue to grow its total revenues before plateauing in the late 2020s through increased penetration, growth in industrial applications and >$1 billion of expected BEV product sales (including e-Axles and centrifugal battery cooling compressors). Margins: Garrett has achieved 19–20% gross margins and 16–17%+ Adj. EBITDA margins. Balance Sheet: Garrett has ~$1.5 billion of long-term debt and <2.5x Debt / EBITDA leverage. Garrett is rated Ba2 and BB- stable. It generates negative working capital (source of cash) when revenues are growing. It's capex requirements are modest at ~2.5% of revenues. History: Garrett was established in 1954. Spun-off from Honeywell in Oct. 2018. Declared bankruptcy in Sept. 2020 due to asbestos liabilities inherited from $HON. Emerged from bankruptcy in April 2021. Normalized its capital structure (into a single class of common stock and borrowings of only unsecured debt in June 2023). Oaktree Capital ( $BN, $BAM), Centerbridge Partners and Cyrus Capital own ~50% of the stock as a result of their convertible preferred stock investments in Garrett at the emergence from bankruptcy. Garrett’s primary competitors are BorgWarner $BWA, IHI and Mitsubishi Heavy in vehicle applications and Accelleron $ACLN.SW (2022 ABB spin-off) in high-speed industrial turbos. Catalysts: 1. Time and valuation. Continued stable free cash flow generation and accretive share repurchases. <6 EV/ EBITDA, P/FCF and <8x P/E. 2. Potential inclusion in Russell or S&P Small Cap stock indices (visibility, coverage and flows). 3. Increase in volumes (hybrid and PHEV (plug-in-hybrids) in 2026 and 2027 model years in U.S. and abroad following U.S. OEM, Hyundai, etc. pivot towards hybrids in 2024. 4. Increase in volumes in industrial applications (datacenter back-up power generators), commercial vehicles and marine applications. 5. Growth of non-turbo BEV (battery electric) product lines (3-in-1 e-Axle, centrifugal compressors, hydrogen fuel cells). Risks: 1. Continued global light vehicle sales weakness leading to lower turbo production volumes. 2. Continued EURUSD FX weakness 3. Multiple compression despite stable or improved business and FCF performance due to concerns about secular risk (long-term BEV growth). 4. BYD hybrid and EV market share gains in domestic Chinese market, Europe and Latam. Toyota hybrid growth. 5. Accelerated demand for pure electric (EV) vehicles (ie. $TSLA) due to consumer demand, technological break-thru (ie. batteries) or enhanced Government mandates. *Ideas area presented at their then current trading price with the objective of holding and achieving strong returns over 1, 3 and 5+ years. Continue to hold all previous “top ideas” as each is below its estimated intrinsic value. Thoughts? Questions?