- By Sydnee Gatewood
The guru's Boston-based hedge fund, which manages about $29 billion in assets as of June 2019, searches for value opportunities among a broad range of options, including stocks, distressed debt, liquidations and foreign securities. With a long-term horizon, the renowned investor typically seeks securities trading well below his estimate of intrinsic value and waits for the price to rise.
According to GuruFocus Real-Time Picks, a Premium feature, Klarman invested in 3.57 million shares of the Swiss company on Oct. 20, allocating 0.13% of the equity portfolio to the stake. The stock traded for an average price of $2.98 per share on the day of the transaction.
In September, the company, which manufactures turbochargers and electric-boosting technologies for original equipment manufacturers and aftermarket retailers, announced it was filing for Chapter 11 bankruptcy protection as it is struggling with debt inherited from its spinoff from Honeywell International Inc. (NYSE:HON), which has been exacerbated by the Covid-19 pandemic, as well as a legal dispute with its former parent company over asbestos liabilities.
As part of its restructuring, the company also sought court approval for $250 million in debtor-in-possession financing to supplement its cash flow and bolster its liquidity position.
In addition, it entered a $2.1 billion "stalking horse" purchase agreement with private equity firm KPS Capital Partners. The deal indicates that any other potential bids that come in for the company must be higher than the offer made by KPS and must be approved by the bankruptcy court.
On Oct. 16, Garrett was approached by Honeywell, Centerbridge Partners and Oaktree Capital Management, which also recently invested in the stock, with an alternative reorganization proposal that would discontinue the auction and sell control to certain institutional investors. It also includes a settlement with Honeywell in regard to the ongoing litigation.
In response, KPS increased its bid by $500 million on Oct. 19 and offered a co-investment opportunity in the new public parent company to Garrett's existing shareholders. Then, Garrett Motion announced on Oct. 26 that it had obtained court approval for bidding protections for KPS's offer while it continues to explore all alternatives for its restructuring. Its auction date is set for Dec. 18.
In a statement, CEO Olivier Rabiller said:
"Garrett is pleased to have obtained the recent relief from the Court, including approval of our debtor-in-possession financing and customer, supplier and vendor programs, as well as the auction procedures and the preservation of the current $2.6 billion bid by KPS. We look forward to working with the various bidders, our stockholder groups and all of our stakeholders on a robust competitive process and prompt emergence from Chapter 11 in the first quarter of 2021."
Valuation and financial performance
Garrett Motion has a $261.71 million market cap; its shares were trading around $3.46 on Monday with a price-earnings ratio of 1.27 and a price-sales ratio of 0.06, which GuruFocus noted are approaching multiyear lows.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is severely undervalued.
GuruFocus rated Garrett Motion's financial strength 4 out of 10. Weighed down by approximately $1.45 million in long-term debt and capital lease obligations, the company has weak interest coverage. Additionally, the Altman Z-Score of 0.24 warns it is in distress since revenue per share has declined over the past year and days inventory is building up.
The company's profitability did not fare much better, scoring a 5 out of 10 rating on the back of margins and returns that outperform a majority of competitors. Garrett Motion also has a moderate Piotroski F-Score of 4, which indicates operations are stable.
With a 4.75% stake, Howard Marks (Trades, Portfolio)' Oaktree is Garrett Motion's largest guru shareholder. Klarman is second with 4.73% of outstanding shares. Other gurus who were invested in the stock as of the end of the second quarter included Mario Gabelli (Trades, Portfolio), Prem Watsa (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Chuck Royce (Trades, Portfolio).
Klarman's $7.98 billion equity portfolio, which was composed of 30 stocks as of the end of the second quarter, was most heavily invested in the communication services sector at 41.88%. He also had smaller holdings in the consumer cyclical (21.08%) and health care (15.83%) spaces.
Another company in the consumer cyclical sector that the guru held as of June 30 was eBay Inc. (NASDAQ:EBAY).
Disclosure: No positions.
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This article first appeared on GuruFocus.