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Turbocharger maker Garrett Motion's (GTX 4.14% ) reorganization in the spring of 2021 makes it a cash-generating machine with a mouthwatering valuation. The company could return additional capital to investors through share repurchases in the coming months. Here's how the opportunity came about.

Garrett sells turbochargers to diesel, light industrial, gas, and hybrid manufacturers. Turbochargers aren't like any old, highly competitive auto part. They are highly engineered devices that require detailed specifications designed into each model. That intimate knowledge of each customer's product has built up significant trust and barriers to entry for any company trying to break into the turbocharger business. Over the decades, the turbocharger market has evolved into a duopoly between Garrett Motion and auto supply behemoth BorgWarner (BWG 1.31% ) .

But Garrett has a checkered history. It was spun out of Honeywell in 2017 with a mountain of debt and an asbestos liability that is entirely unrelated to Garrett's operations. Though the business was doing fine, it slowed considerably in pandemic-stricken 2020. Management seized the opportunity in September to file for Chapter 11 bankruptcy reorganization.

Seeing the value of the company, a private equity firm quickly entered a stalking-horse bid for $2.6 billion for the company. Following a competitive auction, Garrett emerged from bankruptcy only a few months later, in April 2021. In doing so, the company restructured its debt and limited its asbestos liability with Honeywell.

By the end of 2021, things had turned around for Garrett. The company reported that net income had increased sixfold from 2020, and 58% from 2019, to $495  million. In a demonstration of its confidence in the company's future, Garrett's board authorized a $100 million share repurchase plan in November.

In its first-quarter 2022 report, Garrett's full-year outlook included net income from $250 million to $295  million. Like many other companies saddled with inflation and supply chain issues, the company had pared back that outlook from its previous estimates. At the midpoint of its revised guidance, shares traded at a price-to-earnings multiple of only 1.8  times before adjusting for convertible preferred shares. That valuation compares favorably with BorgWarner's 9.8 times forward price to earnings.

The stock does have risks. Though its balance sheet is in better standing after its emergence, it still holds $1.2 billion in long-term debt. However, operating income covered interest expenses 5.4 times over in the first quarter of 2022. That's higher than its five  times in 2019.

The trend toward electric vehicles could harm the company, because EVs don't use turbochargers. Garrett would counter that hybrid cars use turbochargers, and sales of new hybrid vehicles are estimated to grow 29% annually through 2030 to $1.7 trillion. The company has also been investing in the EV space with its automotive software business. Garrett's software is used to bolster performance of EV powertrains. Its software also offers predictive maintenance, cybersecurity, and advanced control tools to connected vehicles.

Gas cars use turbochargers, too. The amount of gas cars on the road is expected to remain stable through 2030, and aftermarket turbochargers for those cars represent about 11%  of Garrett's sales. 

Garrett Motion stock offers investors a high-quality business, an attractive valuation, and an appetizing repurchase program. Now may be an excellent time to test the waters on the stock.

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