Adient's Second Quarter Shows the Recovery Will Take Longer Than We Previously Expected

Adient’s fiscal 2022 second quarter adjusted EPS of a loss of $0.13 fell short of the Refinitiv consensus of a loss of $0.06. Management lowered fiscal 2022 guidance given expectation of industry improvements for the second half of fiscal 2022 are now diminished. We are substantially lowering our fiscal 2022 profit modeled due to the lower guidance, which means a $2 fair value estimate reduction to $64. One positive, however, is that through negotiations with customers, management now only sees a net steel and chemical commodity cost year-over-year headwind of less than $15 million for fiscal 2022, versus February guidance of about $95 million. Management reports it is getting shorter lag times for pricing resets or reimbursements from customers for steel costs; however, other costs, such as ocean freight and utilities costs in Europe, are increasing due to supply chain shortages and the war in Ukraine. Total adjusted EBITDA headwinds from various challenges in fiscal 2022 are guided to about $600 million, with about $475 million of that from issues we and management see as transitory, such as customer production stoppages from supply chain delays, COVID-19 lockdowns in China, and higher commodity costs. The remaining roughly $125 million, which management describes as sticky, is for utility costs in Europe, higher freight cost, and labor cost inflation.