Garrett from Honeywell
Summary
(15 Sep 2018) The Garrett Spinoff has several things going for it including different dividend policies and share counts from its parent. It is highly leveraged and therefore maintains some inherent risk and opportunity. A downturn in the automotive market or the worldwide economy in general would adversely affect this company. Therefore, I will set my entry price below $24/share to provide an adequate margin of safety.
Parent Ticker: HON
Announced Record Date: 18 Sep 2018
Announced Distribution Date: 01 Oct 2018
Anticipated Ticker: GTX
Business
Garrett Motion Inc. is a global leader in the turbocharger industry. Garret designs, manufactures and sells their turbochargers for light and commercial vehicle original equipment manufacturers (OEMs). The company focuses on power-train solutions for gasoline, diesel, natural gas and electrified (both hybrid and fuel cell) engines. Of note, Garrett focuses their turbocharger production for mass market vehicles and has done so since 1962.
Parent Child comparison
The parent company, Honeywell, will remain a large conglomerate industrial. Garrett will operate as a single market OEM. Garrett does not state if they are going to pay dividends after the spinoff.
Spin Ratio
10 parent shares to 1 spinoff share.
Cash Flow
Cash flows from operations has decreased from $367 Million in 2015 to $71 Million in 2017.
Cash Position
Garrett's pro forma balance sheet shows it will have $90 Million in cash and equivalents upon separation.
Revenue Projections
Barring changes in the market, Garrett will most likely have revenues of just over $3 Billion next year. Past growth is consistent with a stable market.
Dividend Policy
Garrett does not state that it will pay a dividend post spinoff.
Management Actions
The CEO and CFO were both offered compensation packages that include restricted stock units (RSUs) equaling approximately 3x their annual salaries. This is to be completed by the fourth year of employment with Garrett. The Chief Technology Officer, and senior vice presidents in charge of customer management and supply chain integration were all offered about 2x their annual salary in RSUs.
Activist Investor Activity
Activist investor activity appears unreported.
Peer Comparison
Garrett has multiple peers in the auto parts market. An analysis of these companies indicates that their average EV/Operating Earnings ratio is approximately 20.3 and their average EV/Cash Flow is approximately 27.8. Given these ratios and considering Garrett's previous operating performance indicates that this company should price somewhere between 34.62-46.22.
Opinion
Garrett provides an opportunity to participate in the growing turbocharger market. I think an entry price of 24/share provides an adequate margin of safety.