Olemedia
Shares of UL Solutions Inc. (NYSE:ULS) have seen a very successful initial public offering, as shares are trading up 20% on their first day of trading, in what generally was a downbeat day for the market.
I understand why investors are upbeat on the business, as the testing company has seen solid and reliable sales growth, it posts solid margins, and employs relatively little leverage.
Believing that shares deserve a premium, certainly as its lower margin consumer business can boost margins down the road, I am quite upbeat on the long-term prospects for the business.
Working For A Safer World
With its predecessor founded in 1894, UL Solutions aims to be the most-trusted, science-based safety, security and sustainability partner. The company aims to make the world safer, more secure and more sustainable.
The trusted and iconic UL mark has appeared on billions of products since it was first issued in the early 20th century, as a trustworthy indication that products comply with safety standards.
In essence, UL Solutions is a global safety science leader which provides independent testing and certification services, as well as related software and advisory services to some 80,000 customers across the globe. The company has grown to an employment base of 15,000 workers, offering more than 600 technical accreditations. This is really a technical business, with about two-thirds of the business comprised of scientists and engineers, to provide these services.
The company has engaged in over 50 bolt-on deals over the past decade, at a combined cost of about $1.3 billion. These deals and organic growth has resulted in revenues growing in a steady fashion from $1.4 billion in 2012 to nearly $2.7 billion in 2023, resulting in a predictable and solid higher single-digit CAGR.
The services are mostly diversified across four divisions. Certification testing, which applies to new products, makes up nearly 30% of sales. A similar percentage of sales is generated from ongoing certification services, and non-certification and other services. All this is complemented by software solutions, responsible for about 10% of sales.
Sales are split pretty evenly between consumer and industrial applications. In terms of geographical coverage, it is the U.S. which makes up 40% of sales. China is responsible for just over 20%, as the wider Asia-Pacific region combined makes up about a third of sales. EMEA is responsible for nearly a fifth of sales.
Valuation & IPO Thoughts
UL Solutions aimed to sell 28 million shares in a preliminary offering range between $26 and $29 per share, with the final price set just above the midpoint of the preliminary offering range at $28 per share. At this level, the offering raised gross proceeds of $784 million with its public offering, or actually more as eventually some 33.8 million shares were offered following an upsized offering.
With 200 million shares outstanding post the offering, the company commands a $5.6 billion equity valuation at the offer price, although the equity valuation has risen to $6.6 billion after shares have risen towards the $33 mark here. This excludes a $590 million net debt load as of the end of 2023, which is unaffected by the offering, as all the IPO proceeds will benefit selling shareholders. At these levels, the entire business is valued at $7.2 billion here.
To put this valuation into perspective: UL Solutions generated $2.68 billion in sales in 2023, a number which rose some 6% on an annual basis. All this growth has been achieved on an organic basis, as the business is valued at around 2.7 times sales. The company posted operating profit of $368 million, or $405 million if we adjust for a goodwill impairment charge, down minimally from a $412 million number in 2022, as mid-double digit margins look quite decent.
Net earnings were reported at $260 million, equal to $1.30 per share, as earnings improved a long way to $1.50 per share if we adjust for the impairment charge. Trading at $33 per share, the company is valued at 22 times earnings, while leverage ratios come in around 1 times here, a perfectly manageable leverage ratio given the growth and predictability of the business.
Moreover, there is real potential as the industrial segment posted segments margins of 27% on a $1.1 billion sales base, a segment which has been flourishing. The consumer segment is equally large in terms of sales, as operating margins come in at just around 8% of sales, even if I adjust for the goodwill impairment charge taken. Even the software business, which is much smaller, has been posting lower margins.
Concluding Thoughts
Truth be told is that I like the UL Solutions Inc. business a great deal, and quite frankly, I think that the growth profile of the business warrants a small premium valuation. Presently, a 22 times earnings multiple and 1 times leverage ratio look very reasonable, certainly as there is potential for segment margins in some areas to improve.
While the valuation risk is not the greatest, other business risks include that of the reputation and potential for quality defects, the rise of AI rendering some of the company’s services less useful, constant need to innovate, reliance on the global economy, impact of potential trade tariffs and barriers, among others. Peers of the business include the likes of SGS, Bureau Veritas, and Eurofins, among many others.
That being said, these are pretty general risks as the business is quite diversified and seems to enjoy rosy long-term growth products. Hence, a premium is warranted to the market, as there is real potential for the business to improve the performance in the consumer business as well.
Given this backdrop, I am genuinely interested in the business and the shares, as I failed to see a quarterly cadence in the numbers in the S1-filing. Presently, I am keeping a very close eye on UL Solutions Inc. shares post the offering, with a real intention to get involved and to learn more about the business here.