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 (
) for the April Value Investing Contest.
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 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
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 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
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.
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.
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
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.
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.
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.
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