TRW: One IPO Worth Test-Driving

Google's IPO will be the Deal of the Year, the hypesters keep telling us. Yes, of course -- for the sellers, bankers, and brokers, since the odds of Google going public at a bargain price are nano-sized. So excuse me for offering the decidedly retrograde suggestion that there might be a better deal coming parts!

That's right, such Machine Age stuff as brake drums and rotors, steering gears and racks, mainstay products of Livonia (Mich.)-based TRW Automotive. Northrop Grumman (NOC ), which merged in 2002 with rival defense giant TRW, sold control of the auto operations a year ago to New York private-equity firm Blackstone Group. Now, Blackstone is aiming to sell a stake in TRW Automotive to public investors in an initial public offering led by Goldman, Sachs (GS ). This deal is coming at a time when the stocks of such bigger competitors as Delphi (DPH ) and Visteon (VC ) are bouncing off record lows.

WILL TRW AUTOMOTIVE, whose board includes former Treasury Secretary and current Blackstone adviser Paul O'Neill, also reward investors this year? It's too soon to say, because the deal's tentative terms -- how much stock and at what price -- have yet to be disclosed, and execs are keeping quiet. Yet TRW Automotive's filings with the Securities & Exchange Commission contain plenty of clues to both its prospects and how the IPO shares might be valued.

TRW was perhaps best known for its spy satellites, yet it never cut its century-long ties to the Rust Belt. Last year, TRW Automotive posted some $11 billion in revenue selling parts to most every carmaker, with more than 60% of sales coming from Ford (F ), DaimlerChrysler (DCX ), Volkswagen, and General Motors (GM ). It holds No.1 or No.2 market shares in North America and Europe for such key items as antilock braking systems, air bags, seat belts, and steering wheels. With a focus on braking and steering plus air bags and seat belts, TRW figures it can grow faster than rivals as regulators and consumers demand more -- and more sophisticated -- safety features, such as side air bags and tire-pressure monitors.

Despite these strengths, with carmakers last year trimming output, profits at TRW Automotive proved harder to come by. Through September, its pro forma operating profits fell 20%, to $440 million, as margins shrank to 5.3% from 7%. How does this compare? Very well, next to industry mastodons Delphi (operating margin: -0.6%) and Visteon (-4%), which still struggle years after being spun off by GM and Ford, respectively. TRW Automotive doesn't show up as well next to such nimbler peers as Magna International (MGA ) (7.3%) or Autoliv (ALV ) (7.5%), a big Swedish air-bag and seat-belt maker.

So what might TRW Automotive be worth? Here are two guides. First, check multiples of enterprise value, or net debt plus stock market value. The enterprise values of Delphi and Visteon run just 0.3 and 0.1 times, respectively, their last 12 months' sales (forget operating income, which for these two was nil or negligible). Autoliv and Magna go for 1 and 0.5 times sales, and 13 and 8 times trailing operating income. TRW isn't as profitable as Magna, but grant it Magna's multiples and its enterprise value might be $5 billion. Second, note what Blackstone paid a year ago: $4.7 billion, including debt. At last report, TRW owed $3.3 billion, net of cash. Subtract that from our two indicators of TRW's enterprise value, and it suggests the equity should be worth $1.4 billion to $1.7 billion. If the IPO values it below that, it's a bargain.

By Robert Barker

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