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Superior Industries International: Value Idea Contest

May 01, 2012 | About:
bjm1625

bjm1625

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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) 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.

Rating: 3.5/5 (12 votes)

Comments

mohmand
Mohmand - 2 years ago
I think a couple other facts that are important to point out,

1) Gross margins have not been the sexiest, mainly due to the plant maintenance, competitive 2009 pricing (contracts are 2-3 years if I read everything right) and high plant utilization (stuff is breaking down) and higher labor wages. To me this sends mix signals, earnings should boost significantly if they can get their margins back to normal.

2) The founder died last November, and depending on lbo markets, this could make an potentially attractive LBO/MBO candidate given its position and solid balance sheet. Maybe management could also enter some sort of resource conversion activity with a large share buyback?

I also am curious about what multiple could this business be taken out at, I think 6-7x EBITDA or some multiple over TBV could be possible. Does anyone have deal data on other auto suppliers?

I am also long, if It continues to drop below TBV, I will def. buy more.
bjm1625
Bjm1625 - 2 years ago
Sorry everyone there was a table showing the DCF...guess it got lost in translation lol..I will add the table in comment section if comment section allows.
cdubey
Cdubey premium member - 2 years ago
@Bjm You can also edit the article itself, I think.

Please leave your comment:


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