Howard Marks (Trades, Portfolio)' Oaktree Capital Management disclosed earlier this week it established a stake in Garrett Motion Inc. (GTXMQ, Financial).
Founded by Marks and several fellow investors in 1995, the Los Angeles-based alternative asset management firm focuses on delivering superior results while observing its six-tenet investment philosophy, which consists of risk control, consistency, market inefficiency, specialization, bottom-up analysis and disavowal of market timing. While it specializes in credit strategies, the firm also invests in high-yield bonds, convertible securities, distressed debt, real estate, control investments and listed equities.
According to GuruFocus Real-Time Picks, a Premium feature, Oaktree invested in 3.6 million shares of the Swiss company on Sept. 25, allocating 0.17% of the equity portfolio to the stake. The stock traded for an average price of $1.75 per share on the day of the transaction.
A few days earlier on Sept. 20, 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. (HON, Financial), which has been exacerbated by the Covid-19 pandemic, as well as a legal dispute with its former parent company over asbestos liabilities.
While the company expects operations to continue uninterrupted, as part of its restructuring, it is seeking court approval for $250 million in debtor-in-possession financing to supplement its cash flow and bolster its liquidity position.
It also entered a $2.1 billion "stalking horse" purchase agreement with private equity firm KPS Capital Partners. The deal implies 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.
In a statement, President and CEO Olivier Rabiller said the proposed deal "will provide a capital structure and institutional support to ensure our long-term viability and set the foundation for the next phase of Garrett's growth."
"Our goal is to emerge…with a strengthened financial position, new and supportive ownership and renewed energy and resources to continue to provide exceptional service to our customers, be a strong and reliable partner to our suppliers and other stakeholders and act as a stable and desirable employer," he added. "I look forward to continuing to work with Garrett's talented team and serving our customers with our advanced technologies."
Garrett plans to emerge from Chapter 11 and complete the sale process in early 2021. At that time, it will begin operating as a private company.
Valuation and financial performance
Garrett Motion has a $245.05 million market cap; its shares were trading around $3.19 on Tuesday with a price-earnings ratio of 1.18 and a price-sales ratio of 0.05, which GuruFocus notes are at 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 $1.44 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 its purchase of a 4.75% stake, Marks' firm is now Garrett Motion's largest guru shareholder. 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).
Portfolio composition
Oaktree's $3.67 billion equity portfolio, which was composed of 72 stocks as of June 30, is heavily invested in the utilities sector, followed by smaller positions in the financial services and technology spaces. Consumer cyclical stocks occupy 12.59% of the portfolio.
Other consumer cyclical stocks Marks' firm currently holds include Taylor Morrison Home Corp. (TMHC, Financial), MercadoLibre Inc. (MELI, Financial), Century Communities Inc. (CCS, Financial), Alibaba Group Holding Ltd. (BABA, Financial) and Ceasars Entertainment Inc. (CZR, Financial).
Disclosure: No positions.
Read more here:
- Steven Cohen Ups Stake in Blank Check Company Netfin Acquisition
- Jana Partners Continues to Whittle Down HD Supply Position
- 5 Energy Companies to Consider as Oil Prices Remain on Shaky Ground
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
