This analysis of Delphi Automotive was provided to TradingIPOs subscribers in advance of its IPO. On November 16, he company announced that its initial public offering of 24 million shares was priced at $22 per share.
Delphi Automotive (DLPH) plans on offering 27.7 million shares at a range of $22-$24. Note that insiders will be selling all shares in this IPO. Goldman Sachs (GS), JP Morgan (JPM), BofA Merrill Lynch (BAC), Barclays (BCS), Citi , Deutsche Bank (DB), and Morgan Stanley (MS) are leading the deal, a slew of others co-managing. Post-IPO, DLPH will have 328.25 million shares outstanding for a market cap of $7.55 billion on a pricing of $23.
DLPH will receive no proceeds from the IPO, therefore there will be no use of proceeds.
Paulson & Co will own 15% of DLPH post-IPO. Paulson is the main seller here, letting go 20+ million shares on ipo.
Delphi filed for Chapter 11 in 10/05. In 2009 Paulson & Co and a number of other participants scooped up the majority of Delphi's historical business. Since the 2005 Chapter 11, DLPH has reduced product lines from 119 to 33, exited 11 businesses and closed over 70 sites decreasing global headcount by 23%. Currently 91% of hourly workforce is located in low cost developing countries. 30% of hourly workforce are temporary employees. In other words, DLPH used the Chapter 11 to shift from a union based North American/Europe workforce into cheap, Mexican, Eastern European, Brazilian and Chinese labor – therefore offering fewer benefits to temporary employees. DLPH has no US pension or post-retirements healthcare obligations, however there appears to be $618 million in foreign liabilities.
From the prospectus:
We are a leading global vehicle components manufacturer and provide electrical and electronic, powertrain, safety and thermal technology solutions to the global automotive and commercial vehicle markets.
One of world's largest vehicle component manufacturers, customers include the 25 largest auto manufacturers in the world. This is a direct play on the health and growth of the worldwide new auto market.
The company has 110 manufacturing facilities with a presence in 30 countries including China.
DLPH stresses how they've shifted their product portfolio to meet and exceed increased worldwide safety, fuel efficiency and 'green' standards. DLPH refers to these as 'megatrends' in the worldwide auto industry.
24% of revenues derived from emerging markets.
The company has roducts in 17 of the 20 top-selling vehicle models in the United States, in all of the 20 top-selling vehicle models in Europe and in 13 of the 20 top-selling vehicle models in China.
43% of revenues are in Europe. As we've noticed, Europe is a bit of a mess lately. Going forward we'll need to keep an eye on the European business here.
GM is 21% of revenues, Ford 9%.
- Electrical/Electronic Architecture - Electrical/electronic backbone for autos. Connectors, wiring assemblies and harnesses, electrical centers and hybrid power distribution systems. 41% of revenues.
- Powertrain - Full end-to-end gasoline and diesel engine management systems. Fuel injection, combustion, electronic controls. 30% of revenues.
- Safety - body controls, reception systems, audio/video/navigation systems, hybrid vehicle power electronics, displays and mechatronics. 19% of revenues.
- Thermal - HVAC systems. 10% of revenues.
#1 or #2 products worldwide in 70% of net sales.
The company is a supplier to every major automotive OEM in China.
Sector - Demand for DLPH's products is driven by the number of vehicles produced worldwide. Global vehicle production is expected to increase annually 6.5% through 2015. That growth is being driven by developing markets, most notably China. DLPH believes over 1/2 of their growth will come from developing markets.
Drivers here are the lean and low cost structure of DLPH geared towards supplying the auto manufacturers in developing markets. All well and good, however keep in mind the US and Europe still make up a significant amount of DLPH's revenue base.
Risks are rather obvious as they usually are - As we witnessed in 2008/2009, the global automotive sector is quite cyclical. Even though DLPH has no legacy costs after their 2006 Chapter 11, there is still significant debt on the books. It does appear to be a well run operation heading into IPO, so while the risk of a repeat bankruptcy appears small, an economic downturn would quickly lead to DLPH missing quarterly/annual estimates.
$1.345 billion in cash in this cash intensive business. Note that DLPH still owes some of this cash to previous owners and underfunded foreign pension benefits. Not a bad balance sheet here with $2.173 billion in debt. Not ideal, but manageable.
2011 - solid year for DLPH through the first nine months. On pace for approximately $16.5 billion in revenues, growth of 20%. Gross margins of 16.5%, operating margins of 10.1%. Debt servicing will eat up 9% of operating profits. As noted above, not ideal but not a dealbreaker either. 4% net after tax margins. EPS of $2. On a pricing of $23, DLPH would trade 11 1/2 X's 2011 estimates.
2012 - Growth should slow here as DLPH's strong 2011 in terms of percentages was in part due to a few years of stagnant revenues in the worldwide auto market. Expect 7%-8% revenue growth to $17.75 billion. The business is so large here and management has done about as good a job pushing margins as possible. Therefore I'd expect margins to remain in the same ballpark, with net margins improving slightly due to lowered debt servicing costs. Gross margins of 16.5%, operating margins of 10.2% with 4.2% net margins. EPS of $2.27. On a pricing of $23, DLPH would trade 10 X's 2012 earnings.
I'd be higher on this deal if the GM IPO would have performed better since its debut. DLPH at 10 X's 2012 estimates would trade at a hefty premium to their largest customer GM's 5 X's 2012 estimates. That's a concern. Other than that though, this deal looks solid. Debt is not eating up too much of operating profits, management has done a nice job of growing margins in a space historically difficult to achieve margin growth.
Some near term headwinds here as well with GM's recent lackluster report (21% of DLPH's revenues) and Europe's government debt issues. I like this deal, other than the quite large P/E disparity here between supplier and largest customer. That may present an issue.