In our June 2018 Covered Call Corner screen, we identified an auto parts manufacturer, Adient ADNT as a possible bond replacement investment candidate. Bill Nygren, the well-known portfolio manager of the Oakmark Select fund had recently increased his stake in Adient by 114%, boosting his allocation to 4.4% of the Oakmark portfolio.
Last Friday, I published an update on our June Covered Call Corner, showing that I had taken a 1% position in Adient by selling a put option struck at $55 per share and expiring on October 19, 2018. The Effective Buy Price for this position is $51.90.
This morning (6/11/2018), the company announced that:
- It was firing its Chairman and CEO (Bruce McDonald) immediately and replacing him in the CEO role by GM’s former president and CEO, Fritz Henderson.
- It was revising down its EBITDA and free cash flow guidance for fiscal year 2018.
The market did not interpret this announcement favorably, sending the price of Adient’s shares down by 15.6%, to close at $48.07 per share.
Looking through the company’s most recent annual and quarterly reports, Adient appears to be a bad business that is poorly managed; a tough combination. While it is the largest producer of automotive seating in the world, apparently, one of its businesses, “Seat Structures & Mechanisms” (SS&M) has been badly underperforming and has some structural issues that make the performance difficult to improve.
The company is a spinout from Johnson Controls JCI, which is itself a long-suffering supplier to US automakers, GM in particular. Adient was only spun off in 2016 when Johnson Controls merged with Tyco. Both Adient and Johnson Controls are incorporated in the Republic of Ireland, as was the pre-merger Tyco.
If Adient’s business issues were not concern enough, as a company with manufacturing centers in Canada, Mexico, and China, as well as in the US, Adient is uncomfortably exposed to looming trade frictions.
The more I read about Adient, the less I liked about it. That said, the present market price is only 7.4% below my Effective Buy Price, and since the allocation is only 1% of the portfolio, at present, I am facing a 0.07% headwind on the portfolio as a whole.
Under the assumption that sometimes it is better to do nothing than to do something, I have decided to sit on the position for a while and see if the stock price moves closer to my Effective Buy Price. There is still plenty of time before October, and while I am less excited about owning this company long-term, being patient usually doesn’t hurt anything.
An investor presentation describing what the company is doing to restructure its SS&M business is embedded below and this and other materials can be found on the company’s investor relations website.
Loading...
Reload document 
Open in new tab