Superior Industries (SUP) designs and manufactures wheels for car, truck and SUV manufacturers in North America. But while auto sales have bounced back in a big way from the depths of the recession, shares of Superior are in the dumps, near a 52-week low. But this is a company trading for just $430 million despite net cash of $193 million and free cash flow of $50 million last year alone!
Superior is the leading provider of aluminium wheels to North American car manufacturers with some 30% of the market, which may provide it with some scale economies. Superior can spread its R&D budget of $5 million across a large volume of units, which could confer some advantage. A single-digit P/E may be a low price to pay for such an advantage.
At the same time, however, there are risks which may keep the value investor away. First, 65% of the company's sales are concentrated in just two customers: GM and Ford. While these relationships help maintain the company's scale, they can also be used by the car makers to push the company on price. Customer concentration also represents a big risk; a single decision to go with another supplier by an executive at one of these companies could hurt the company's profitability significantly.
Superior is also reliant on aluminium costs. Normally, these costs are passed on to the customer, but aluminium is not the only game in town. About 35% of the wheel market is steel, and so if the economics of steel improve relative to those of aluminium, Superior will be out of luck. Predicting the earnings power of businesses that are reliant on commodities with volatile prices is very difficult!
Finally, Superior appears to be at capacity currently. As such, margins may be at their peak (and they are hardly impressive, with gross margins coming in at 8%, suggesting the company has no pricing power). Further volume increases will therefore also require capital outlays with uncertain results, particularly as auto manufacturers trend towards sourcing parts from lower-cost (e.g. Asian) jurisdictions.
Superior Industries is well-capitalized, with cash representing almost half of its market cap. Unfortunately, it's very difficult to ascertain the company's earnings power within a reasonable range, thanks to the commodity nature of its inputs, low-cost competitors, and customer concentration. There appear to be better ideas out there!
H/T Frank Voisin
Disclosure: No position
This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to the feed.
