It’s been a couple of weeks since Array Technologies (NASDAQ:ARRY) sold 7 million shares of its stock for $142 million in net proceeds. Oaktree Capital and founder Ron Corio sold 40.5 million shares of Array Technologies stock.
Post-initial public offering, given the underwriters chose to exercise their option to buy an additional 7,125,000 shares from the selling shareholders, ATI Investment Parent LLC owned 57% of the company.
Two questions come to mind.
- It gained 65.7% on Oct. 15, its first day of trading. It’s gained a little since, but not much. Should Oaktree fully exit its investment once the six-month lock-up period ends?
- Will Array’s share price go up or down between now and then?
The first question is much easier to answer than the second.
Oaktree Should Sell Its Position
To answer this question, one first needs to understand what Oaktree’s cost basis is for its shares.
Oaktree acquired Array in July 2016 in conjunction with Ron Corio and its management team. No financial details were provided by Oaktree’s Power Opportunities group when it made the announcement.
However, we know from the dilution section of Array’s IPO prospectus that the average price per share for existing investors was $4.55. So, between Oaktree, Corio, and the other management that participated in the buyout, they contributed $546 million in equity with the rest of the purchase price covered by debt and cash on the balance sheet.
According to the principal and selling stockholders section of the IPO prospectus, Oaktree owned 66.5 million (55.5%) of the 119.99 million shares outstanding, with the directors and officers, including Corio, owning the rest. At $4.55 a share, that’s an equity outlay of approximately $303 million.
If management sold 24.5 million shares in the IPO, Oaktree sold 23.2 million shares for net proceeds of $482 million.
Post-IPO, it owns 43.3 million shares that it must hold until mid-April 2021. Those are currently worth $1.64 billion based on a $37.82 share price. Assuming this share price in six months, Oaktree will have total net proceeds of $2.1 billion from a $482 million investment, a return of 600%.
But there’s more.
Borrowing against a new $575 million first-lien term loan, it paid out a special distribution of $589 million to pre-IPO shareholders, including Oaktree.
Based on 55.5% ownership pre-IPO, that’s another $327 million to add to its haul for an even better total return of 708%, or 63.5% on an annualized basis. By comparison, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) had a compound annual growth rate of 10.9% over the same period.
Given private equity investors like to move on within five to seven years of investing in a portfolio company, I would think if the share price is the same as it is today or higher, it will most likely sell.
Where Will Array Technologies Stock Go in the Next Six Months?
On Oct. 23, InvestorPlace’s Larry Ramer recommended that investors wait for a post-election pullback before buying its stock because even though it has real potential over the next few years, it’s a better buy around $32 or $33.
Two days before Ramer’s call, InvestorPlace’s Matt McCall also suggested ARRY was too hot to touch.
“[W]ith triple-digit top-line growth, there is good reason why Wall Street is chomping at the bit. Yet, there’s also good reason why shares could pull back from recent prices,” McCall wrote on Oct. 21.
“But, on a pullback, consider this a screaming buy. Given the multiple positive factors at play, there’s no denying the opportunity. Potential policy changes and corporate America’s pivot toward green energy are just two developments that support the long-term solar megatrend.”
Both of my colleagues point to the secular trend to solar power happening worldwide as the strongest argument for owning its stock over the long haul.
I agree with their assessment.
For me, the fact that in the six months ended June 30, it went from an operating profit of $14.6 million a year ago to an operating profit almost 10 times that ($102.6 million) in the latest period tells me this is a business that could really make some serious profits over the next few years.
Furthermore, as Ramer points out, Array had a gross margin in the first six months of 2020 of approximately 25%. While that’s less than its competitors, whose gross margins are in the 30s, they’re up 620 basis points in 2020.
If the business keeps moving in the right direction, I could definitely see ARRY moving higher in the next six months.
By how much? That I couldn’t tell you.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
