ismagilov
Shares of Loar Holdings (NYSE:LOAR) have been a huge success as the company went public. After shares doubled from the preliminary offering range, already demanding valuations have become outrageously high as investors seem to hope that Loar is becoming a second TransDigm in the making.
I am very cautious to get involved here, on the back of extremely high valuations, as the risk-reward makes it very hard to get upbeat, or involved with the shares here.
Aerospace & Defense Components
Loar is a designer, manufacturer, and seller of niche aerospace and defense components. The company focuses on mission-critical, highly engineered solutions which carry a lot of intellectual property. In fact, the company claims that some 85% of sales are generated from products in market-leading positions, with some half of sales generated from aftermarket products.
The products manufactured involve a wide range of applications such as auto throttles, airbags, seat belts, water purification systems, tie rods, fire barriers, sensors, switches, sealing solutions, among many others.
Most of the business is focused on commercial aviation, responsible for about 45% of sales, a quarter comes from business jets & general aviation, a fifth from defense, and about ten percent from non-aviation end markets. RTX is the largest customer, as other key customers include Honeywell, Bombardier, Boeing, Airbus, with all other customers combined making up about two-thirds of sales.
The business has only been founded back in 2012 by CEO Dirkson Charles which had a long career before in the industry, as Mr. Charles has employed a fairly aggressive acquisition strategy to grow the business.
Valuation & IPO Thoughts
Loar aimed to sell 11.0 million shares in a preliminary offering range between $24 and $26 per share, with solid demand making that the final price was set at $28 per share. This makes that some $308 million in gross proceeds were obtained with this offering, that is excluding any potential funds received from the over-allotment option.
With 88 million shares outstanding, the equity valuation of the firm stands at $2.46 billion. This excludes about a $330 million pro forma net debt load, after accounting for the proceeds from the public offering, pushing up the enterprise valuation to $2.79 billion here.
For the year 2022, Loar generated $239 million in sales on which it posted healthy operating profits of nearly $40 million, for handsome margins in the high-teens. The company was quite leveraged at the time, as all these profits were needed to service debt. Revenues rose by nearly 33% to $317 million in 2023, as operating profits improved to $69 million and change, with operating profit margins improving to nearly 22% of sales.
Adjusted EBITDA of $113 million makes that leverage is seen around 3 times pro forma the public offering, allowing for potential to see GAAP profits as interest expenses will come down here.
The strong growth is driven by dealmaking activity, including some more recent deals. In July 2023, the company acquired Desser Aerospace propriety Solutions, as the company acquired CAV Systems Group in September of last year.
This results in continued upward pressure to the reported results. Fourth quarter results for 2023 rose by 25% to $86.4 million, for annualised revenues of $345 million, with operating profits trending around $70 million here as no real earnings growth has been seen on this front in recent quarters. Assuming that operating profits trend around $75 million on an organic basis here, as the company can refinance debt at 6%, interest expenses could fall substantially to $20 million per annum (although this will not happen overnight). Pre-tax profits of $50 million would yield earnings potential of $37 million assuming a 25% tax rate, for relatively modest earnings of $0.40 per share.
The company furthermore started 2024 on a solid note with preliminary first quarter sales seen up 22% to nearly $91 million, with adjusted EBITDA seen at a midpoint of $32.5 million. In comparison, the company posted adjusted EBITDA of $29 million and change in the fourth quarter, which suggests that operating profits might trend around $80 million per annum here, revealing a roadmap for earnings of $0.50 per share.
This all changed as the IPO was a huge success, with the company seeing shares trade up 75% to $48.80 per share. This pushed up the enterprise valuation to $4.6 billion, with the business now trading around 13 times sales, 35 times adjusted EBITDA and a roughly 100 times earnings multiple.
Concluding Thoughts
The truth is that I am quite surprised by the huge momentum displayed by the shares on the first day of trading, pushing up the valuations to too high levels, as discussed in the previous paragraph.
This is in my eyes the biggest risk of the stock, as other risks include the reliance on continued acquisitions, but of course also general economic conditions, as well as incidents and circumstances which hurt aviation in particular: notably a pandemic, weaker economy, or terroristic attack.
The truth is that it looks as if Loar is aiming to replicate the success of industry leader TransDigm (TDG). This company is far greater, seeing sales around $7.5 billion this year, making this business some 20 times bigger than Loar.
With a current enterprise valuation of $87 billion, TransDigm trades around 12 times sales, yet its EBITDA margins surpass 50%, while Loar’s margins are stuck in the mid-thirties.
With Loar, not being in the same league as TransDigm, I find it very hard to get upbeat on Loar here, nor do I think that it could be an acquisition target for TransDigm at current valuations, making me very cautious at these levels, as expectations have simply flown the sky-high.
