When companies are set to go public, investors are often abuzz with anticipation. But not all initial public offerings (IPOs) are greeted with enthusiasm.
A decade ago, for example, more than one analyst expressed doubt about the IPO of one well-known company. High leverage and operational inefficiency made the stock dubious at best, they warned.
The stock was volatile right off the bat, dropping 24% in its IPO year of 2004 and then rising 27% in 2005.
Then the market began consistently punishing the company for its heavy debt, cumbersome business model and faltering profits, sending shares down 2% in 2006 and 19% in 2007. With the added weight of the financial crisis, the stock sank 83% in 2008.
Just four years after debuting at about $27 per share, this stock was hitting lows in the $1.40 to $2 range.
Well, things are a whole lot different now.
The stock has staged one of the most impressive comebacks of the past half decade, soaring 1,960% since the beginning of 2009. It now trades above $70 a share.
This would have been impossible if the firm, automotive parts supplier TRW Automotive (NYSE: TRW), hadn't slashed debt and stayed focused on restructuring efforts initiated before the recession. Today, TRW is one of the leanest and least indebted players in its industry, carrying $1.3 billion of total debt versus a peak of nearly $4 billion in the months before its IPO.
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TRW's debt-to-equity ratio of 0.4 is below the industry average of 0.5. Its debt rating was recently raised to investment grade by Moody's and S&P.
The company also has a leg up on the industry in virtually all key measures of valuation, growth, and profitability, as the following table illustrates.
Source: Morningstar
The question now is whether TRW can keep rewarding shareholders with outsize returns. I think it can.
With the auto industry now on a firm growth track after nearly collapsing during the financial crisis, there should continue to be solid demand for the vast array of auto parts TRW provides for automakers. These products range from things like steering, braking and suspension systems to engine components, climate control systems and touch sensors for interior vehicle controls.
Importantly, TRW is a leader in fast-changing area of auto safety technologies, and the company supplies such products to at least 40 automakers, including the industry's behemoths. In addition to established safety features like airbags, seatbelts, tire pressure monitors and anti-lock brakes, the company develops many of the more advanced safety technologies that are just becoming widely available, like collision avoidance braking and computer-assisted steering.