Executive Summary / Key Takeaways

• Margin Pressure from Mix, But Cost Discipline Holds: Garrett faces a structural headwind as lower-margin gasoline turbochargers grow faster (13% in Q3 2025) while higher-margin diesel and aftermarket segments weaken, yet sustained fixed-cost actions and variable cost productivity have preserved adjusted EBIT margins near 14%, demonstrating operational leverage that could amplify earnings if mix improves.

• Capital Allocation Balances Growth Investment with Shareholder Returns: The company is returning 75% of adjusted free cash flow to shareholders through a 33% dividend increase and $84 million in Q3 2025 buybacks while simultaneously investing 4.6% of sales in R&D (over 50% directed to zero-emission technologies), creating a rare combination of immediate yield and long-term optionality.

• Technology Moat Extends Beyond Declining ICE Market: Garrett's high-speed electric motor expertise and air foil bearing technology, originally developed for automotive turbochargers, are creating defensible positions in industrial applications (MEG turbos for data centers exceeding $100 million in 2025 sales) and emerging zero-emission markets (E-Powertrain production starting 2027), potentially offsetting the gradual erosion of pure internal combustion engine demand.

• Competitive Position Strengthens Through Specialization: With an estimated 30% share in the $10 billion turbocharger market, Garrett's focused strategy yields superior operating margins (14.41% vs. BorgWarner's 8.41% and Continental's -4.91%) and faster innovation in electric boosting, though this concentration also creates vulnerability to customer concentration and slower commercial vehicle penetration relative to integrated rivals like Cummins.

• Key Execution Variables Will Determine Multi-Year Returns: The investment thesis hinges on whether Garrett can scale its industrial turbo business to hundreds of millions within 3-5 years while maintaining pricing discipline in gasoline turbos and successfully launching E-Powertrain technology in 2027, as any slip in execution timing could leave the company overexposed to a shrinking pure-ICE market.

Setting the Scene: Turbocharging's Bridge to Electrification

Garrett Motion Inc., incorporated in 2018, emerged as a pure-play technology leader focused on emission reduction and energy efficiency solutions for the mobility and industrial sectors. The company designs, manufactures, and sells highly engineered turbocharging, air and fluid compression, and high-speed electric motor technologies to original equipment manufacturers (OEMs) and distributors worldwide. This narrow focus on boosting technologies distinguishes Garrett from diversified powertrain suppliers, creating both intense specialization and concentration risk.

The industry structure reveals a market in transition. The global turbocharger industry, valued at approximately $10 billion, faces a fundamental tension: while pure internal combustion engine (ICE) volumes gradually decline due to electrification, hybrid vehicles—particularly plug-in hybrids and range-extended electric vehicles—require turbochargers to optimize their combustion engines. This creates a bifurcated demand environment where traditional diesel passenger car turbos shrink but gasoline turbos for hybrids surge, and entirely new applications emerge in data center backup power and hydrogen fuel cells.

Garrett occupies an estimated 30% market share, positioning it as the leader in a near-duopoly with BorgWarner (25-30% share). Unlike integrated competitors Cummins (which ties turbos to its engine business) and Continental (which treats turbos as part of a broader powertrain portfolio), Garrett's standalone focus enables deeper R&D investment per revenue dollar and faster iteration on boosting technologies. However, this specialization also means Garrett lacks the diversification cushion that helps rivals weather ICE downturns—when light vehicle production weakens in Europe and China, as it did throughout 2024 and early 2025, Garrett feels the impact directly.

The company's strategic response to this structural shift defines the investment case. Rather than merely defending its ICE turbo franchise, Garrett is leveraging its core high-speed motor and aerodynamic compression expertise to build three parallel growth vectors: (1) industrial turbos for genset and marine applications, (2) E-Powertrain systems for commercial vehicle electrification, and (3) E-Cooling compressors for thermal management. The success of this pivot will determine whether Garrett can grow earnings in a declining core market.

Technology, Products, and Strategic Differentiation

Garrett's competitive moat rests on proprietary high-speed electric motor technology and aerodynamic compression expertise refined over decades of turbocharger development. The company's variable geometry turbos for diesel engines and advanced wastegate turbos for gasoline applications deliver 15-20% fuel economy improvements in known applications, creating measurable value that justifies premium pricing. More importantly, this technology foundation translates directly into emerging markets.

The MEG turbo line, launched in late 2023, represents Garrett's largest turbos ever engineered, targeting genset and marine applications. In Q3 2025, management disclosed over $40 million in new awards for stationary power generation products, with full-year 2025 sales expected to exceed $100 million—a double-digit increase versus 2024. This matters because genset applications, particularly for data center backup power, offer higher margins than automotive turbos and create recurring aftermarket revenue streams once the installed base matures. The global expansion of data centers provides a structural tailwind independent of automotive electrification, diversifying Garrett's revenue base.

The E-Powertrain technology leverages the same high-speed motor expertise for heavy-duty commercial vehicle electrification. Garrett secured its first series production award from HanDe Axle in Q1 2025, with production targeted for 2027. This validates the technology's commercial viability and positions Garrett to capture value in China's commercial vehicle market, where battery electric penetration leads the world. The margin profile for E-Powertrain is expected to be accretive to turbo margins, offering a path to offset the unfavorable mix from gasoline turbo growth.

E-Cooling compressors represent a third technology pillar, applying oil-free centrifugal high-speed compression to thermal management for both vehicles and industrial applications. Management reports strong momentum with industrial customers, demonstrating significant efficiency gains against existing technologies. Key differentiators—high-speed electric motors for efficiency, low noise, and air foil bearings developed for automotive—create a technology package that outperforms conventional industrial compressors. This opens markets like rooftop air conditioning and data center cooling, where efficiency standards are tightening.

Why does this technology breadth matter? It transforms Garrett from a pure-play ICE component supplier into a high-speed rotation technology company addressable across multiple end markets. The same core competencies serve gasoline turbos (current cash cow), diesel turbos (declining but high-margin), industrial turbos (growth vector), and zero-emission compressors (future optionality). This creates a platform for R&D leverage: investments in motor efficiency or bearing technology benefit all product lines simultaneously.

Financial Performance & Segment Dynamics

Third quarter 2025 results illustrate both the resilience and fragility of Garrett's model. Net sales increased 9% to $902 million, with constant currency growth of 6%—outpacing light vehicle production growth in key markets. Adjusted EBIT margin remained robust, but the composition reveals the mix challenge. Gasoline turbo sales surged 13% to $405 million, driven by share gains and new launches in Europe, China, India, and North America. This growth contributed to an unfavorable product mix because gasoline turbos carry lower margin rates than diesel or commercial vehicle products.

Diesel turbo sales increased 12% in Q3 to $201 million, but this masks a deeper structural decline. For the nine months ended September 30, 2025, diesel sales decreased 2% as European passenger vehicles transition to gasoline hybrids. The remaining diesel volume concentrates in light commercial vehicles—delivery vans and pickup trucks—where diesel is expected to persist due to range and fuel consumption requirements. Management's confidence in being the "last man standing" for diesel turbos reflects this market rationalization, but it also means the addressable market is shrinking.

Commercial vehicle turbo sales grew 6% to $164 million, supported by new on-highway program launches in Europe and recovery in construction and agriculture applications. Aftermarket sales declined 1% to $116 million, with weakness in North American off-highway replacement parts as customers destock inventory. This aftermarket softness further pressures mix, as aftermarket historically carries higher margins.

The industrial turbo segment provides the clearest margin expansion story. The MEG turbo line's $100 million-plus revenue projection for 2025 represents a significant, double-digit increase from 2024, with management expecting "hundreds of millions" within 3-5 years. Data center backup power applications drive this growth, offering a structural tailwind decoupled from automotive cycles. Once installed, these large turbos generate recurring aftermarket revenue, improving the long-term margin profile.

Cost discipline remains the critical enabler of margin stability. Garrett's adjusted EBIT increase in Q3 2025 stemmed entirely from higher volumes and sustained fixed cost actions implemented in 2024, which offset the 60 basis point headwind from unfavorable mix. The company recovered $12 million in tariffs during the quarter, though newly implemented tariffs created 20 basis points of margin dilution. Management's ability to flex variable costs while maintaining structural cost reductions demonstrates operational leverage that could drive significant earnings upside if mix improves.

Capital allocation reflects confidence in the business model. Garrett returned $84 million to shareholders in Q3 2025 through dividends and buybacks, including a $62 million purchase of shares from Oaktree Capital Management. The Board increased the quarterly dividend 33% to $0.08 per share for Q4 2025, and approved a new $250 million share repurchase program for 2026. Simultaneously, Garrett made a voluntary $50 million debt repayment in October 2025, reducing leverage and interest expense. This balanced approach—funding growth R&D while returning capital—suggests management believes the stock remains attractively valued despite trading near 52-week highs.

Competitive Context and Positioning

Garrett's competitive positioning reflects a deliberate trade-off between focus and diversification. With an estimated 30% share in the turbocharger market, Garrett leads BorgWarner (BWA) (25-30% share) in a near-duopoly structure. This concentration creates pricing power in core automotive turbos but also exposes Garrett to share shifts. Financial metrics reveal the specialization premium: Garrett's 14.41% operating margin and 9.22% net margin significantly exceed BorgWarner's 8.41% operating margin and 0.95% net margin, while Continental's negative operating margin highlights the cost of its broader but less focused portfolio.

BorgWarner's diversification into batteries and e-motors provides a hedge against ICE decline that Garrett lacks, but it also dilutes R&D intensity and margins. Garrett's pure-play focus enables faster innovation in boosting technologies—management notes they continue winning over 50% of new turbo awards, consistent with the past five years. This share capture occurs despite BWA's integrated e-boosting systems, suggesting Garrett's standalone turbos offer superior efficiency for specific applications.

Cummins (CMI) presents a different competitive threat. Its vertical integration (engines + Holset turbos) and dominance in heavy-duty commercial vehicles give it a locked-in customer base that Garrett cannot easily penetrate. However, Cummins' slower pivot to light vehicle electrification and its focus on hydrogen for heavy-duty applications create an opening for Garrett's E-Powertrain technology in commercial vehicles, particularly in China where battery electric adoption is more advanced.

Continental's (CTTAY) smaller turbo business (5-10% share) suffers from divisional silos that slow innovation, allowing Garrett to outcompete on performance and win share in European and Asian light vehicles. Continental's system integration approach—combining turbos with its own electronics—creates compatibility advantages but sacrifices peak turbo performance, a trade-off that favors Garrett's specialized focus.

The key competitive asymmetry lies in electric boosting. Garrett's high-speed motor technology, originally developed for fuel cell compressors, translates directly to E-Turbos and E-Powertrain applications. This creates a technology bridge that diversified competitors cannot easily replicate without abandoning their existing product architectures. If Garrett can commercialize E-Powertrain at scale by 2027, it will have a 2-3 year lead in high-speed electric motors for commercial vehicles, potentially capturing share from slower-moving integrated rivals.

Outlook, Management Guidance, and Execution Risk

Garrett's 2025 guidance midpoint implies net sales of $3.55 billion (flat to +1% constant currency) and adjusted EBIT of $510 million, representing a margin of approximately 14.4%. Management raised the outlook twice during 2025, first to reflect Euro strength and tariff recovery, then to incorporate improved automotive industry forecasts for the second half. This upward revision suggests underlying demand stability, though the guidance remains conservative relative to potential upside.

The company's capital allocation framework targets returning 75% or more of adjusted free cash flow to shareholders over time, a commitment that management reiterated while noting returns will vary based on macro conditions. This flexibility is prudent given the uncertain tariff environment—management estimates $60 million of exposure that can be passed through, but notes the situation remains fluid. The 20 basis point margin dilution from new tariffs in Q3 2025 demonstrates that even with pass-through mechanisms, trade policy creates friction.

Execution risk centers on three variables. First, the gasoline turbo growth that drives volume also pressures margins; if this mix shift accelerates, cost productivity must intensify to maintain EBIT margins. Second, the industrial turbo ramp must deliver on its "hundreds of millions" revenue promise within 3-5 years to offset ICE decline and justify current R&D spending. Third, E-Powertrain must hit its 2027 production start date without delays, as any slippage would push the zero-emission revenue trajectory further into the future, leaving Garrett more exposed to ICE market shrinkage.

Management's R&D strategy provides some mitigation. By directing over 50% of R&D spending to zero-emission technologies while maintaining total R&D at 4.6% of sales, Garrett funds future growth without sacrificing current margins. The inauguration of a new R&D center in Wuhan, China, reinforces this commitment while positioning the company closer to key customers and the world's fastest-moving EV market.

Risks and Asymmetries

The most material risk to the thesis is customer concentration. Garrett's top five customers represent over 50% of revenue, creating vulnerability if major OEMs shift sourcing to integrated suppliers like BorgWarner or develop in-house boosting capabilities. The company's success in winning over 50% of new awards provides some reassurance, but a lost contract with a major European or Chinese OEM could materially impact revenue and margin.

Supply chain dependencies on specialized alloys and rare metals pose a second risk. While Garrett recovered $12 million in tariffs during Q3 2025, ongoing trade tensions could increase COGS by 5-10% if pass-through mechanisms fail. The company's region-for-region manufacturing approach limits exposure, but it cannot eliminate geopolitical risk entirely.

The ICE-to-EV transition creates a strategic asymmetry. If hybrid vehicle adoption accelerates beyond expectations, Garrett's gasoline turbo business could grow faster than anticipated, improving mix as high-performance hybrid turbos command premium pricing. Conversely, if battery electric vehicle adoption surges and hybrids stagnate, Garrett's addressable market could shrink faster than its industrial and zero-emission businesses can compensate, compressing revenue and margins by 10-15%.

A positive asymmetry lies in data center growth. If global data center construction continues at its current pace, Garrett's industrial turbo business could exceed the "hundreds of millions" target, creating a third major revenue pillar alongside automotive and zero-emission technologies. The recurring aftermarket revenue from these large turbos would improve margin stability and reduce cyclicality.

Valuation Context

Trading at $16.72 per share, Garrett Motion trades at 10.7 times trailing earnings and 9.1 times free cash flow, a significant discount to the broader industrial technology sector. The enterprise value of $4.68 billion represents 7.8 times EBITDA and 1.3 times revenue, multiples that reflect the market's skepticism about the company's ability to navigate the ICE-to-EV transition.

Peer comparisons highlight the valuation gap. BorgWarner trades at 60.9 times earnings but only 7.4 times free cash flow, reflecting its lower margins and higher capital intensity. Cummins trades at 26.3 times earnings and 30.8 times free cash flow, commanding a premium for its diversified engine business and hydrogen exposure. Continental trades at a negative P/E due to restructuring costs but trades at 7.7 times free cash flow, similar to Garrett.

Garrett's superior margins—20.6% gross margin, 14.4% operating margin, and 9.2% net margin—suggest the market is pricing in significant revenue decline. However, the company's 13.9% return on assets and 1.94% dividend yield (with an 11.5% payout ratio) indicate a healthy, cash-generative business with ample capacity to fund growth and returns.

The balance sheet supports this valuation. With $862 million in liquidity, net leverage below 1.0x EBITDA, and a recently refinanced term loan extending maturity to 2032, Garrett has the financial flexibility to invest through cycles. The voluntary $50 million debt repayment in October 2025 signals management's confidence in cash generation and reduces interest expense, providing a modest tailwind to earnings.

Conclusion

Garrett Motion's investment case centers on whether the company can execute a technology pivot while maintaining margin discipline in its core business. The company's 30% market share in turbochargers, combined with superior operating margins and a fortress balance sheet, provides a durable foundation. However, the unfavorable product mix from gasoline turbo growth and aftermarket weakness creates near-term headwinds that cost productivity alone may not fully offset.

The key variables that will determine multi-year returns are the industrial turbo ramp and E-Powertrain launch timing. If Garrett can scale its data center backup power business to hundreds of millions of dollars by 2028 while successfully launching E-Powertrain production in 2027, the company will have built two new growth vectors that more than compensate for ICE decline. The technology moat—high-speed motors and air foil bearings—gives Garrett a fighting chance to achieve this transition faster than integrated competitors.

Trading at 10.7 times earnings and 9.1 times free cash flow, the market appears to price in a pessimistic scenario of secular decline. Yet management's capital allocation discipline, demonstrated through the 75% free cash flow return target and proactive debt reduction, suggests insiders see a more resilient business. For investors, the asymmetry is clear: successful execution of the industrial and zero-emission strategy could drive 15-20% earnings growth despite ICE headwinds, while failure would likely result in a slow decline masked by shareholder returns. The next 18 months will reveal whether Garrett's technology bridge can span the gap between its legacy cash cow and its future growth engines.