Johnson Controls International PLC (JCI) Spin-Off: Is Adient a Buy or Sell?

Johnson Controls International PLC (NYSE:JCI) will spin off its automotive seatings and interiors businesses on October 31.  The newly formed company will be called Adient and trade under the ticker (ADNT).

Johnson Controls shareholders will receive 1 share of Adient for every 10 shares of Johnson Controls.  The date of record to receive these shares is October 19.  No action is required for shareholders – new shares will be distributed automatically.

Note:  Remainders of less than 10 shares will be sold, with cash distributed to Johnson Controls shareholders based on the amount of shares they hold.

Johnson Controls International PLC (NYSE:JCI) currently ranks as a buy using The 8 Rules of Dividend Investing. The question of what to do with shares of the new spin-off is pertinent.

Should current Johnson Controls shareholders hold shares of Adient – or sell them?

This article answers this question by examining Adient’s competitive advantage and earnings power.  Fair value for the new company is also estimated.

Business Overview

Adient will be the global leader in automotive seating and interiors based on volume.  The company will have:

– 230 Locations

– In 33 Countries

– With ~74,000 Employees

Operations will be split into 2 segments:  Seatings and Interiors.  The Seatings segment is about four times the size of the Interiors segment based on sales data over the last 9 months.

The company’s revenue and earnings will be cyclical and dependent upon new car production.  As a supplier of automotive interiors and seating, Johnson Controls does not have control over new car production.  Therefore, growth is tied to factors outside the company’s control.  The image below shows global vehicle production over the last several years:

Source:  Adient Spin-Off Information Report

The automotive industry is not growing equally in all markets.  Growth in China is far outpacing growth in Europe and the United States.

Importantly, Adient will be the largest supplier of automotive seats in China thanks to its 17 joint ventures and 60 manufacturing facilities.  The company currently has 45% market share in China.

The image below gives a breakdown of the company’s sales by geography.

Source:  Adient Spin-Off Information Report

Note:  Unconsolidated sales are a result of joint-venture sales, primarily in China.