Garrett Motion Beats Q4 Estimates but Earnings Decline Highlights Structural Risks

What happened

Garrett Motion reported Q4 earnings of $0.42 per share, surpassing the Zacks consensus estimate of $0.35, yet this represents a drop from $0.47 per share a year ago, signaling ongoing earnings pressure. The company has experienced an 87% stock run-up to $18.04, pricing in optimistic assumptions about sustained mid-teens EBIT margins and a seamless pivot to zero-emission technologies. DeepValue analysis cautions that current margins rely on temporary FX and commodity tailwinds, with turbo volumes expected to decline and zero-emission revenue contributions delayed until at least 2027. Aggressive capital returns, including a $250 million 2026 buyback program, heighten financial risk if free cash flow weakens amid pricing headwinds and mix challenges. The upcoming 2026 guidance will be crucial to assess whether management can uphold margin targets or if normalization is imminent, given the crowded bullish sentiment and high valuation.

Implication

The earnings beat may fuel short-term momentum but does not mitigate core concerns about structural pricing pressure and declining turbo volumes, which could erode margins over time. With zero-emission projects still in pre-scale phases and heavy R&D spending, near-term earnings growth remains reliant on a cyclical turbo business facing headwinds. The aggressive capital return policy, while appealing, increases leverage risk if free cash flow falls short, potentially forcing cuts to buybacks or dividends during a downturn. At approximately 11x trailing EPS, the stock is fairly valued in the base case scenario, leaving little room for multiple expansion without evidence of durable margin improvement. Prudent investors should avoid new positions at current levels, consider trimming above $22, and wait for a pullback to $15 or clearer signs of margin resilience in 2026 guidance.

Thesis delta

The Q4 earnings beat reinforces near-term operational execution but does not shift the fundamental thesis, as it fails to address the long-term risks of margin normalization and delayed zero-emission contributions. It underscores the urgency of 2026 guidance to confirm mid-teens EBIT margins and adequate free cash flow, maintaining the 'POTENTIAL SELL' rating until more sustainable profitability is demonstrated.