Baupost Group leader Seth Klarman (Trades, Portfolio) disclosed earlier this week he curbed his firm’s stake in Garrett Motion Inc. (GTX, Financial) by 13.99%.
The guru’s Boston-based hedge fund searches for value among a broad range of opportunities, 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. Baupost manages about $31.6 billion in assets.
Marking the first reduction since establishing the initial investment, GuruFocus Real-Time Picks, a Premium feature based on 13D, 13G and Form 4 filings, showed Klarman sold 500,000 shares of the Switzerland-based company on June 8, impacting the equity portfolio by -0.07%. The stock traded for an average price of $8.20 per share on the day of the transaction.
The investor now holds 3.07 million shares total, accounting for 0.43% of the equity portfolio. GuruFocus data shows the firm has gained an estimated 8.43% on the investment so far.
About Garrett Motion
Founded in 1954, the company manufactures engineered turbocharger and electric-boosting technologies for light and commercial vehicle original equipment manufacturers and aftermarket parts distributors. It operates through a single segment.
The stock made its public debut in May of 2021.
Valuation
Garrett Motion has a $2.06 billion market cap; its shares were trading around $7.76 on Wednesday with a price-earnings ratio of 10.78 and a price-sales ratio of 0.10.
While the stock has risen more than 30% since its initial public offering, shares have declined nearly 2% year to date.
At 57 out of 100, the GF Score indicates the company has poor performance potential. While it received a high profitability rank, the growth, financial strength and value ratings were more moderate. Further, Garrett Motion did not receive a grade for momentum, so its full potential may not be properly reflected.
Capital restructuring
On June 13, Garrett Motion announced the conversion of Series A preferred stock into common stock, which was part of an agreement it reached with Centerbridge Partners and funds managed by Oaktree Capital Management in April to simplify its capital structure.
According to the terms of the deal, the company converted all outstanding Series A preferred shares into a single class of common stock. Further, all holders of the preferred stock received a payment of the accrued and unpaid dividends through July 30, plus an additional amount that represents the dividends that would have been accrued through Sept. 30.
Garrett Motion also agreed to repurchase approximately $285 million worth of the preferred stock from both Centerbridge and Oaktree at a market-based price.
The company noted the conversion not only sets the stage for greater market capitalization, but “enhanced liquidity, a path to index inclusion and a more diversified shareholder base.”
In a statement, President and CEO Olivier Rabiller said, “We are pleased we have achieved this important milestone to benefit all our shareholders, providing more financial flexibility to Garrett as it invests for the future in both its core emission reduction turbo business as well as in new differentiated technologies for zero emission mobility. It will also enable the Company to engage more effectively with the investment community with greater liquidity and a normalized capital structure.”
As of the end of the fourth quarter, Klarman held 25.48 million of Garrett’s preferred shares (GTXAP.PFD, Financial). With a weight of 3.89%, it represented his 10th-largest holding.
Earnings review
On April 24, Garrett Motion reported its financial results for the first quarter.
For the three months ended March 31, the company posted revenue of $970 million, which was up 8% from the prior-year quarter. However, net income of $81 million, or earnings of 13 cents per share, declined from a year ago.
"Garrett had an excellent start to the year with revenue growth that significantly outpaced the global light vehicle industry, driven by new product launches and program ramp-ups,” Rabiller said. “This growth, together with Garrett's strong operational execution, allowed us to achieve another quarter of outstanding financial results and cash flow generation.”
Looking ahead, the company also reaffirmed its guidance for the year. It expects revenue between $3.79 billion and $3.98 billion as well as net income in the range of $231 million to $268 million.
Guru interest
Of the gurus invested in Garrett Motion, Howard Marks (Trades, Portfolio)’ Oaktree has the largest stake with 5.53% of its outstanding shares.
As of the end of the first quarter, 13F filings show Chuck Royce (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio), Prem Watsa (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) also have positions in the stock.
Portfolio composition
Klarman’s $5.82 billion equity portfolio, which was composed of 30 stocks as of the first quarter, was most heavily invested in the communication services and technology sectors.
According to the 13F filing for the three months ended March 31, Klarman’s five largest positions were Liberty Global PLC (LBTYK, Financial), Alphabet Inc. (GOOG, Financial), Viasat Inc. (VSAT, Financial), Qorvo Inc. (QRVO, Financial) and Vertiv Corp. (VRTV, Financial).
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
