After A Disappointing Public Offering, Constellium Shares Are Not An Obvious Buy

| About: Constellium Holdco (CSTM)
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Constellium NV (NYSE:CSTM) made its public debut on Thursday, May 23rd. Shares of the leading manufacturer of innovative specialty rolled and extruded aluminum products ended their first trading day with losses of 3.1% at $14.53 per share. Shares did manage to rebound a bit in Friday's trading session. Still, one has to conclude that the public offering is quite a failure.

Despite the discount after the "failed" public offering, I am not in a rush to initiate a long position at these levels based on valuation concerns.

The Public Offering

Constellium is a global leader in the design and manufacturing of aluminum products serving the aerospace, packaging and automotive markets. The company has manufacturing sites across the globe and it adds value for its customers by converting aluminum in semi-fabricated products. Thanks to this differentiation strategy, and being the preferred choice of its blue-chip customers, Constellium is able to demand higher margins compared to some of its competitors.

Constellium sold 22.2 million shares for $15 a piece. The company itself sold half the shares, with selling shareholders including Apollo and Rio Tinto selling the remainder of the shares. Constellium sold 11.1 million shares to the public, raising $167 million in gross proceeds for the firm.

The public offering values the equity of the company around $1.50 billion. The offering was quite a disappointment. Initially the firm and selling shareholders anticipated to sell shares in a preliminary price range of $17-$19 per share.

Some 22% of the total shares outstanding were offered in the public offering. At Friday's trading levels at $14.82 per share, the firm is valued around $1.48 billion.

The major banks that brought the company public were Goldman Sachs (NYSE:GS), Deutsche Bank (NYSE:DB), J.P. Morgan Chase (NYSE:JPM), Barclays (NYSE:BCS), Credit Suisse (NYSE:CS) and Morgan Stanley (NYSE:MS), among others.


Constellium, formerly known as Omega Holdco BV, was created following Rio Tinto's (NYSE:RIO) acquisition of Alcan back in 2007. Rio divested the engineeerd products division after completing the $38 billion deal, in what became Omega Holdco and is now listed again under the name of Constellium.

Constellium owns 26 production facilities across the world and has almost 9,000 employees. With its global presence and its flexible manufacturing process, the firm believes it is well positioned to serve its global customer base. Key industrial customers include names like Airbus. S.A.S. as well as Boeing (NYSE:BA). Key automotive OEMs include BMW AG and Volkswagen (OTCPK:VLKAY).

The solid diversification and the differentiation strategy allows Constellium to report high margins and provide more stability through the economic cycles, according to the company's records. It also offers more favorable growth fundamentals given the massive backlogs in the aerospace industry and shifting trends in Automotive towards the usage of aluminum.

In January of 2011, Constellium acquired the Alcan Engineered Aluminum Product business. The following financial results reflect the impact of the acquisition. Furthermore note that Constellium reports in Euro's as it is based in the Netherlands. As such all amounts are translated into US dollars assuming an exchange rate of $1.30 for every Euro.

For the year of 2012, Constellium generated annual revenues of $4.69 billion, up 1.5% on the year. Gross profits increased by 49% to $621 million on the back of economic improvements. The company turned around a $226 million loss in 2011 into a $174 million profit over the past year. The company took $144 million in "other" charges in 2011, while it realized $68 million in benefits in 2012.

Constellium ended its fiscal 2012 with $81 million in cash and equivalents. The company operates with a total of $489 million in short and long term debt, for a net debt position of $408 million. Factoring in roughly $150 million net proceeds form the offering, the firm's net debt position will be reduced to a manageable $250 million.

Friday's equity valuation of $1.48 billion, values the firm at around 0.3 times annual revenues and roughly 8-9 times 2012's annual net earnings.

Investment Thesis

As noted above, the public offering of Constellium is an outright disappointment. Shares were offered 16.7% below the midpoint of the preliminary offering range and are currently exchanging hands at $14.82 per share, trading some 17.7% below the midpoint of the guided range.

The company derives by far the majority of its revenues from Europe, and therefore has not optimally benefited yet from the recovery in the global economy. For the period to 2012-2017, market research company CRU estimates that demand for extended products will increase by 6.2% per annum, while flat rolled products are expected to increase by 5.5%.

Risks related to the offering are clearly the state of the world economy, and that of Europe in particular. There is a bit of concentration risk as well, as the 10 largest customers make up almost half of total volumes, but that is inevitable given the nature of the industry.

The continued underperformance of the European economy has put pressure on the expected results for the first quarter of 2013. Shipment volumes and revenues are expected to fall between 2 and 3%, resulting in first quarter revenues of $1.18-$1.19 billion.

Profitability is expected to fall from earnings of $73 million last year, to anywhere between a loss of $5 million and a modest profit of a million dollars. Worsening profitability is driven by unrealized losses on derivative contracts and amortization of refinancing fees. Excluding these items, adjusted earnings would have increased on the year.

Shares of Constellium traded with losses of 10% in its first trading day, around $13.50 per share, before recovering later during the day. While bankers and selling shareholders aimed for a high price in the offering, even a discount failed to spark interest in the firm.

"Adjusted" earnings for 2012, excluding the one-time items, came in just north of $105 million, valuing the business around 14 times last year's earnings. While this is still a high multiple for a cyclical business, Constellium claims it is positioned to be less volatile to general market circumstances in the aluminum market.

Even more so, its large exposure to Europe might actually represent good value as margins could pick up when the European economy finally recovers. The more "stable" nature of the backlog in the aerospace division might furthermore dampen the impact of the economic fluctuations on the business.

Despite the modest leverage, the discount following the public offering, and the somewhat acceptable valuation multiples, I remain on the sidelines. While shares definitely offer appeal amidst a European economic recovery, shares remain inherently linked to the economic tide making the current valuation a bit rich to my taste given the poor outlook for European economic growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.