Auto component manufacturer Garrett Motion (NASDAQ: GTX) announced a big secondary offering, meaning more shares on the market. Investors are responding by lowering the value of the shares already out there, sending Garrett down 10% as of 10:45 a.m. ET.
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Insiders getting out
Garrett is the former auto division of Honeywell International, and today is a maker of turbochargers for internal combustion engine vehicles as well as components for hybrid and battery electric vehicles.
The company took a trip through bankruptcy following its separation from Honeywell but is back on public markets with significant ownership from the private equity firms that helped it through its restructuring.
Those private equity owners have been steadily selling down their stakes. Late Monday, Garrett announced a 17 million share offering of stock owned by affiliates of Oaktree Capital Management, Centerbridge Partners, and Cyrus Capital Partners.
Garrett will not receive any proceeds from the offering, but did announce it has authorized the underwriter to repurchase up to $25 million of the stock to be sold.
Is Garrett stock a buy?
Private equity by its nature is not a long-term holder. These investors have long telegraphed their intention to cash out on their investment over time in order to return the capital to their investors. While existing investors understandably don’t like secondaries because they boost the amount of stock available for trading, and can alter supply and demand dynamics, it is part of the story with Garrett.
Despite the ownership overhang, the story is still arguably a good one. Garrett has transformed itself into a free-cash-flow generating machine with ample capacity to repurchase those added shares over time and reward shareholders with a dividend currently yielding 2.3%.
For patient investors looking for solid cash generation stories, Garrett is an attractive option despite the near-term volatility.
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Lou Whiteman has positions in Garrett Motion. The Motley Fool recommends Garrett Motion. The Motley Fool has a disclosure policy.
