The Old Ball and Chain
Lots of industries encourage specialties. They ask for specialization at each link in the chain. Semiconductors is one. Lamplighter talks about that one often. Car parts is another. Lamplighter talks about that one less often. Lots of different companies make specific pieces, like turbo chargers, that go into cars and trucks.
Companies love specialization because it's often defensible. If you make a particular kind of cleaning machine for semiconductors, that's really difficult to do and cleaning is really important to the process. Customers will depend on you and be shy of switching to someone else. That's great when an industry is booming — SEMICONDUCTORS! Who else can customers turn to? But what about when an industry isn't booming? What about those turbo suppliers, like, say, Garrett Motion?
The internal combustion engine supply chain is less fun to think about than semiconductors because the engines that use turbo chargers will keep fading into history. Eventually most cars will be battery electric. Battery electric cars — Polestars, Rivians, Lucids — don't use turbo chargers.
So, RIP Garrett?
Having a blast
The humble combustion engine won't land on the scrap heap of history for a while though. Durable things in the real world can take a long time to go away. IBM still makes money from mainframes — something that "died" in the 1990s. Even the Yellow Pages were still publishing in 2019.
Automakers have pivoted away from battery electric vehicles to hybrid electrics. Those all use turbos to boost efficiency. Hybrid vehicle sales grew faster this year and last year than battery electric vehicles.
But that will still go away, eventually, right?
Spin cycle
What if Garrett's niche was not specifically making "turbos for internal combustion engines," but a more generally applicable "engineering fast spinning things?" It's introduced a few lines of zero-emission products: 1. fuel cell compressors, 2. e-cooling compressors and 3. electric powertrains. These offer a glimmer of life for Garrett post combustion engine. Management expects these lines to grow from less than 10% of the business today to a third of the business by 2033.
How’s that going?
SinoTruck designed Garrett's e-powertrain into trucks it'll start selling in 2027. Two commercial customers are parking Garrett's e-cooling compressors into their electric buses for battery and cabin cooling. Its sold its fuel cell solution into upcoming production of buses, medium and heavy-duty trucks.
Three cylinder engine
Garrett has three things going for it.
Its bread and butter market — internal combustion engines — is going to stick around for a while.
Hybrid's — which all feature turbos — are a fast growing market.
For a life after combustion engines, Garrett already has solutions on the market going into production models.
Investors' expectations rose for the company after its latest earnings. Shares jumped by a third in the couple days after earnings. Price still only rose from a very low level of expectations to a slightly less low level. Meanwhile the company has been kicking off cash. It's retired 20% of its shares since the last time Lamplighter brought them up in late 2023.
At the same time, it's kept up its product development to ensure it has products for generations of trucks and cars to come. The development pipeline ought to be able to break free from the internal combustion chain holding down investors’ expectations eventually. For now, the gap between investors’ expectations and Garrett’s prospects offer an attractive investment opportunity.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.