It has been a long time since I wrote an analysis for GuruFocus, but I am back and ready to go at it again. For my first analysis back I am going to be talking about Superior Industries International (SUP, Financial) for the April Value Investing Contest.
Company
Superior Industries International engages in the design and manufacturing of aluminum road wheels for sale to original equipment manufacturers. They are one of the largest suppliers of cast aluminum wheels to the world’s leading auto mobile and truck manufacturers. These wheels are usually sold for factory installation as standard or optional equipment.
Superior manufactures and sells products in North American and Mexico. The operations in Mexico accounted for $520 million and 63% of sales.
Over 75% of net sales come from the Big 3 (Ford, GM and Chrysler) with no other customer representing over 10% of sales.
A Look into the Automotive Industry
The automotive industry is a notoriously cyclical industry based heavily on consumer demand to purchase vehicles. Consumer purchases depend on numerous macro economic conditions such as availability of consumer credit, interest rates and fuel cost.
Prior to 2008, production rates of vehicles in North America reached or exceeded roughly 15 million units per year. The financial crisis and subsequent recession hit the automobile industry hard and caused major setbacks. Lack of access to consumer credit, shifting vehicle demand, rising fuel cost resulted in vehicle production reaching lows of 8.6 million units in 2009.
In 2010, the automotive markets began to recover as the economy as a whole moved out of recession. Production swung up 39% from 2009 lows. As of 2011 auto markets have continued to do well in North America.
How did SUP combat the recession?
During the recession and drop of demand Superior took drastic steps to reduce cost. They closed manufacturing plants in Kansas and California which eliminated almost 1000 jobs.
Management
Management has been in place for a while and have done well at squeezing out as much return as possible for their investors. ROE for the firm is 14.83%, ROA is 11%, and ROC is 12.6 %. Gross Margins are 9.8%, which is about 5% above the five-year average, operating margins are 6.5 percent which is 6% above five-year average and Net margins are 6.2 % which is roughly 10% above five-year average.
Management has also declared cash dividend of .64 cent that is paid on a quarterly basis, that is a yield of 3.54% with a dividend payout ratio of 26%. The board of directors has also authorized 4 million share repurchase. There are still 3.2 million shares available to be repurchased.
Financial Strength
Superior has no debt on its balance sheet and they have about $193 million in cash and short-term investment. The current Book value per share is about $17.14.
Valuation
When I look for companies to invest in I begin by looking at the graham number. As we know the Graham number does not take growth into the valuation. The formula is √(22.5*eps*bv) in this case the EPS for the TTM is 2.41 and the book value for the most recent quarter is 17.14. Plugging these numbers into the equation you get a value of 30.48.
Since valuation is a art and not a science, I typically try to use a couple of different models to analyze the company. The second valuation I use is a DCF model. I use owner earnings which is a conservative measure of free cash flow to equity which does not add back in the net debt.
This model assumes that cost of equity of 9.65% and growth is calculated as ROE x the dividend ratio which gave a growth rate of 10% and a perpetual growth rate equal to 2%.
Based on valuation, superior has a margin of safety of 44% using the Graham number and a 58% margin of safety based on the DCF valuation.
Risk
One of the major risks for the company is auto industry conditions. With majority of the net sales coming from the big three, any major declines in the health of these companies (which was the case in 2008 and 2009) and their production volume would have material adverse effect on the company.
Another major risk is the impact of aluminum pricing. Since a major component of the wheel is aluminum, prices and margins will fluctuate with the price of aluminum.
Catalyst
The major catalyst for superior would be the continued improvement in the production volumes in the North American market. The continued improvement in the financial health and stability in the Big Three is also a major catalyst in this stock continuing to rise.
Conclusion
While Superior Industries International is a highly cyclical company, it is priced significantly less than it's worth. In fact, after today’s 5.47% drop the stock is trading at around book value. For those that are willing to buy this company and ride the roller coaster it could yield big returns.
Company
Superior Industries International engages in the design and manufacturing of aluminum road wheels for sale to original equipment manufacturers. They are one of the largest suppliers of cast aluminum wheels to the world’s leading auto mobile and truck manufacturers. These wheels are usually sold for factory installation as standard or optional equipment.
Superior manufactures and sells products in North American and Mexico. The operations in Mexico accounted for $520 million and 63% of sales.
Over 75% of net sales come from the Big 3 (Ford, GM and Chrysler) with no other customer representing over 10% of sales.
A Look into the Automotive Industry
The automotive industry is a notoriously cyclical industry based heavily on consumer demand to purchase vehicles. Consumer purchases depend on numerous macro economic conditions such as availability of consumer credit, interest rates and fuel cost.
Prior to 2008, production rates of vehicles in North America reached or exceeded roughly 15 million units per year. The financial crisis and subsequent recession hit the automobile industry hard and caused major setbacks. Lack of access to consumer credit, shifting vehicle demand, rising fuel cost resulted in vehicle production reaching lows of 8.6 million units in 2009.
In 2010, the automotive markets began to recover as the economy as a whole moved out of recession. Production swung up 39% from 2009 lows. As of 2011 auto markets have continued to do well in North America.
How did SUP combat the recession?
During the recession and drop of demand Superior took drastic steps to reduce cost. They closed manufacturing plants in Kansas and California which eliminated almost 1000 jobs.
Management
Management has been in place for a while and have done well at squeezing out as much return as possible for their investors. ROE for the firm is 14.83%, ROA is 11%, and ROC is 12.6 %. Gross Margins are 9.8%, which is about 5% above the five-year average, operating margins are 6.5 percent which is 6% above five-year average and Net margins are 6.2 % which is roughly 10% above five-year average.
Management has also declared cash dividend of .64 cent that is paid on a quarterly basis, that is a yield of 3.54% with a dividend payout ratio of 26%. The board of directors has also authorized 4 million share repurchase. There are still 3.2 million shares available to be repurchased.
Financial Strength
Superior has no debt on its balance sheet and they have about $193 million in cash and short-term investment. The current Book value per share is about $17.14.
Valuation
When I look for companies to invest in I begin by looking at the graham number. As we know the Graham number does not take growth into the valuation. The formula is √(22.5*eps*bv) in this case the EPS for the TTM is 2.41 and the book value for the most recent quarter is 17.14. Plugging these numbers into the equation you get a value of 30.48.
Since valuation is a art and not a science, I typically try to use a couple of different models to analyze the company. The second valuation I use is a DCF model. I use owner earnings which is a conservative measure of free cash flow to equity which does not add back in the net debt.
This model assumes that cost of equity of 9.65% and growth is calculated as ROE x the dividend ratio which gave a growth rate of 10% and a perpetual growth rate equal to 2%.
Based on valuation, superior has a margin of safety of 44% using the Graham number and a 58% margin of safety based on the DCF valuation.
Risk
One of the major risks for the company is auto industry conditions. With majority of the net sales coming from the big three, any major declines in the health of these companies (which was the case in 2008 and 2009) and their production volume would have material adverse effect on the company.
Another major risk is the impact of aluminum pricing. Since a major component of the wheel is aluminum, prices and margins will fluctuate with the price of aluminum.
Catalyst
The major catalyst for superior would be the continued improvement in the production volumes in the North American market. The continued improvement in the financial health and stability in the Big Three is also a major catalyst in this stock continuing to rise.
Conclusion
While Superior Industries International is a highly cyclical company, it is priced significantly less than it's worth. In fact, after today’s 5.47% drop the stock is trading at around book value. For those that are willing to buy this company and ride the roller coaster it could yield big returns.
