What a difference a year makes. Moving from a company whose average earnings over the past five years were $1.06 per share, to a company that lost $1.01 per share during fiscal 2017 made me wonder what was going on.
It turns out that managment of Superior Industries International (SUP, Financial) took what I considered to be a sleepy little wheel fabrication company and gave it a swift kick in the pants with the purchase of German wheel maker Uniwheels AG, for an agregate purchase price of $766 million.
My wonder with this purchase is was it really worth it? It's a given that for the vast majority of companies, when they acquire an existing business they are going to overpay, debt is often going to increase, and at least initially, earnings increases are going to be marginal and the balance sheet is going to look like it belongs in a landfill.
What I cannot figure out is why management would essentially pay a $305 million premium for this company. I know that is the premium because last year the company had no goodwill on its balance sheet and this year it has $305 million.
I also wonder if increasing debt by roughly seven times from what was on the books in fiscal year 2016 just to own this company was really in the best interest of shareholders? I have to question managment's decision when they voluntarily pay 100% premium to acquire a company.
I realize that some of what was spent to acquire Uniwheels were one time expenses, like the $31.64 million management spent on financing cost for example. But some of the costs of the acquisition were not one-time expenses and will be on going for some time. The increase in interest costs the compay will have until the funds it borrowed to finance the acquisition have been repaid come to mind here.
To me the central question becomes: Will the acquisition pay for itself, at least pay for itself long enough to allow the company to recoup all of the costs associated with the acquistion?
I think the answer is no. I just don't see the acquisition adding that dramatically to earnings, nor do I see the demand for what the company does holding together over the next three to five years.
I realize that you have to break some eggs if you want to make a cake, and in some ways management has done just that. I just hope they haven't killed off the chickens in the process.
Superior Industries International Inc.
Superior Industries designs and manufactures aluminum road wheels for sale to original equipment manufacturers including Ford, General Motors, Toyota, Fiat Chrysler Automobiles N.V., BMW, Mitsubishi, Nissan, Subaru, Volkswagen and Tesla. Industry peers include Maxion Wheels, The CarlStar Group and Meritor Inc.
Short-Term Value
My short-term (three-to-six-week hold) target price for the stock is $18.56, with an initial trailing stop at $17.43. Upward price movement will find resistance at $18.04 and $19.23. Downward price movement will find support at $16.66 and $16.01, with final support at $15.05.
Days to Cover
The most recent days to cover number is eight. The days to cover number is a measurement of the company’s outstanding shares that are currently shorted, expressed as the number of days required to close out all the short positions. The number is determined by dividing the number of outstanding shares currently shorted by the average daily volume. The days to cover number is sometimes used as a volatility precursor for a stock.
The Tax Act
The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.
The Securities and Exchange Commission staff issued Staff Accounting Bulletin (SAB) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.
To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
It is important to note that income tax adjustments applied to repatriated earnings and deferred taxes, may distort a companies earnings and consequently its fair value.
In the case of Superior Industries International Inc., the impact primarily consists of $7.3 million related to re-measurement of U.S. deferred tax assets due to the lowering of the corporate tax rate described above and $9.3 million of expense for the estimate of the impact of one-time transition tax on the mandatory repatriation of earnings of foreign subsidiaries. The company anticipates additional guidance and clarification regarding the implementation of the transition tax will be issued by federal and state taxing authorities and this estimate is, therefore, subject to future refinement.
Note that for fiscal 2017, 27% of net income came from income tax benefits.
Insider transactions
In the past 12 months, the company reported 67 insider trades involving 285,687 shares of stock. Of those 67 insider trades, 41 were buys involving 229,470 shares of stock, and 26 were sells involving 56,217 shares of stock, creating an insider buy-sell ratio of 4.1 to 1.
Mergers and acquisitions
During fiscal 2017 the company acquired Uniwheels AG, a European company that develops, produces and sells alloy wheels for the automotive and accessory markets, providing its wheels under the ATS, Rial, Alutec and Anzio brands to tire and wheel retail chains, wholesalers, retailers and car dealers. The aggregate purchase price was $766.2 million.
Divestitures and dispositions
There were no divestitures or dispositions during fiscal 2017.
Year-over-year
Several year-over-year metrics of interest are revenue growth, free cash flow growth, earnings growth, debt growth, price growth,and year to date price growth. For Superior Industries International Inc., revenue decreased by 51%, earnings decreased by 159%, free cash flow decreased by 65%, total debt was increased almost seven times 2016 levels and the stock price decreased by 75%. Year to date the stock price is up 19%.
Future value
My future (five-year hold) target price for the stock is $31, which is an average annual return of 15%. A prior five-year hold of the stock (fiscal 2013 to fiscal 2017) would have returned an average of -3% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.
Baseline and fair value
As an ongoing concern, my baseline valuation for the company is $8. Baseline valuations are based on free cash flow value, net current asset value, book value and tangible book value. My current fair value for the stock is -$8. The fair value number is my current valuation for a stock based on earnings, earnings growth and the current five-year yield of a AAA-rated corporate bond. Value investing buy, sell and close targets are derivatives of fair value.
Value considerations
Other value considerations include the price-earnings ratio, the PEG Ratio, book value and tangible book value. For Superior Industries International,Ă‚ the current 12-month trailing price-earnings ratio is -17, the PEG ratio is -1.6, book value is $24 and tangible book value is $3.
Fair warning
Fair warning means that the time for bidding has ended and an exchange is about to be concluded. Superior Industries International is overvalued. The stock is currently trading at levels above with my most recent -$12 close target.Â
Disclosure
I hold no shares of Superior Industries International Inc.
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