Some IPOs take off with a bang, like Groupon's (Nasdaq: GRPN) sorta-celebrated launch a few weeks back; others land with a thud (as Groupon has done more recently). Delphi Automotive's (Nasdaq: DLPH) Nov. 16 debut fell pretty clearly into the latter category from the start: After pricing at the bottom of its expected $22-to-$24 range, it dropped on its open, closing at $21.33 on its first day of trading -- and it has fallen further since.
To be fair, these haven't been ideal market conditions for IPOs in general -- many of November's initial offerings ended up pricing at the low end of their expected ranges, or even lower, and half of the IPOs that came out during the week of Delphi's debut closed lower after their first day. Groupon held steady in the mid-$20 range for a few weeks, before crashing recently to below $17.
But not many IPOs come to market with long, sordid histories like Delphi's. And while the company is better-positioned than many rivals, it's not exactly a tempting buy.
A history of head-smacking losses
Delphi was once a division of General Motors (NYSE: GM). As the General's in-house parts supplier, Delphi competed with outside firms for contracts to make things like seats and wheels for GM vehicles, helping to ensure -- or so went the thinking at the time -- that GM wouldn't be completely reliant on other firms for key parts. But times changed, and GM spun Delphi off in 1999 under the leadership of star executive J.T. Battenberg III, hoping that it would find profitability as a supplier to other automakers as well.
That didn't happen. After its spinoff and (first) IPO, Delphi lost money nearly every quarter before crash-landing in bankruptcy court in 2005. Delphi's problems mirrored its parent's, only more so: Too much production capacity and too-rich labor contracts, along with margins squeezed to nothing by intense pressure from automakers desperate to cut costs. Battenberg was forced to resign amid accusations of creative bookkeeping -- he would eventually be fined $215,000 -- and the company endured four years of painful restructuring before emerging from bankruptcy in 2009.
Similar pressures drove key rival Visteon (NYSE: VC), a Ford (NYSE: F) spinoff, through bankruptcy as well. Visteon emerged in 2009, but is still working on shedding low-margin businesses as it seeks to focus more on Asia, and may be broken up into several pieces at some point.
Despite that rough history, like its former parent, Delphi hasn't done too badly since bankruptcy. Through the third quarter, the company has earned $911 million this year, up 49% over the year-ago period, despite subdued auto sales in markets around the world. No longer GM's lackey -- the General accounts for about a fifth of Delphi's business, CEO Rodney O'Neal said recently -- Delphi now counts the German luxury-car makers among its top customers. And thanks to their relatively high margins and a still-booming market for luxury cars in places like China, the outlook for those automakers is better than most despite the downturn in Europe.
But that doesn't mean you should rush out and buy Delphi.
A good business, but in a tough space
Automakers around the world rely on a global network of suppliers like Delphi to produce everything from seats to stereos to paint. Often, the suppliers are simply producing parts to designs supplied by the automakers, but increasingly, major suppliers develop materials and technologies which they pitch to automakers for inclusion in future models.
Top auto suppliers -- Tier 1, in the industry parlance -- include Delphi as well as giants like Magna International (NYSE: MGA) and Johnson Controls (NYSE: JCI), which (among other things) is investing heavily to become a major player in the emerging market for electric-car batteries. With low debt, great management, solid revenue growth, and a good dividend, Johnson Controls may be the best bet for investors looking for exposure to this space.
The new and improved Delphi might well rival it someday, but it isn't there yet. Delphi had $2.2 billion of debt as of Sept. 30, and the IPO proceeds won't reduce that by a nickel, because all of the shares sold were owned by outside investors. And while Delphi has some exposure to faster-growing emerging markets, Europe accounted for 43% of its sales in 2010. Luxury makers' success notwithstanding, European automakers are having a really tough time right now.
Still, Delphi has done some things right: By locating its plants in lower-cost regions like Mexico, Eastern Europe, North Africa, and China, it should be able to preserve decent margins at the rock-bottom prices demanded by the automakers. And trends in the auto business favor Delphi's centers of expertise, which include advanced safety, infotainment, and green-car technologies.
But I think Delphi's stock is likely to lag the market until there's more evidence that its apparent health is genuine -- and until global demand for autos resumes its upward course. If and when that changes, I'll let you know.
- Add Delphi Automotive to My Watchlist.
- Add Visteon to My Watchlist.
- Add Magna International to My Watchlist.
- Add Johnson Controls to My Watchlist.
- Add Groupon to My Watchlist.
- Add General Motors to My Watchlist.
- Add Ford to My Watchlist.
