Yesterday, shares of Garrett Motion (GTX 8.07%) fell 10% after the company announced a big secondary offering. Today, the stock is making back most of what it lost. Shares of Garrett Motion are up 9% as of 10:45 a.m. ET, and the stock is now down just 3% over the past five days.
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A shifting shareholder base
Garrett, the former auto division of Honeywell International, is a maker of turbochargers for internal combustion engine vehicles, as well as components for hybrid and battery electric vehicles.
The company has faced a lot of potholes since becoming independent. Garrett filed for bankruptcy in 2020 to shed liabilities, and returned to public markets with significant ownership by private equity firms that helped it through its restructuring.
Private equity firms, by their nature, are not long-term investors. The firms have been steadily selling down their stakes. Late Monday, Garrett announced a 17 million share offering by those private equity firms, causing the stock sell-off.
As we said at the time, the sales were well telegraphed and are likely not a reflection of the long-term prospects for the business. Since its restructuring, Garrett has turned into a strong cash generator and has used that cash to partially offset the dilution caused by the selling shareholders.
Is Garrett a buy?
The bad news for investors is this drama is not yet over. Even after the offering, the three private equity firms still own more than 20% of Garrett's total shares. That's down from 55% when the company went public, but still implies further selling from here.
The good news is that these sales should not impact an investor focused on the long term. Garrett is a solid cash-producing business with significant market opportunities as automakers try to make their legacy fleet more fuel efficient and plan for an electric future.
For investors seeking a turnaround story that provides a mix of income and growth, Garrett is an attractive candidate despite the ownership overhang.
