Superior Industries (SUP) is one of the leading manufacturers of aluminum wheels and was founded in 1957. The company has two plants in Arkansas, three in Mexico, one in Hungary, and a small investment in an aluminum wheel manufacturer in India. The company provides wheels to original equipment auto manufacturers such as General Motors (GM), Ford (F), Chrysler, BMW (BMW) etc. The Big 3 in the U.S. account for about 76% of the company's overall sales, and Superior has contracts on various models with each company. Because of this, the sales mix of models and brands can have a significant impact on Superior's results. Superior offers a compelling investment opportunity due to its low valuation, high dividend yield, and its potential as an acquisition candidate.
Superior is in a very strong financial position with a growing cash balance and no long-term debt. At $18.27, Superior has a market cap of about $498MM on 27,249,138 shares outstanding. Total shareholders' equity is $482.996MM, but in my estimation this number would be less in a liquidation scenario, as plant values may not be as high as reflected on the balance sheet. At the end of the 3rd quarter, Superior reported cash and cash equivalents of $214.894MM and short-term investments of $5.011MM. This equates to about $8.07 per share in net cash and given the company's $.16 a share quarterly dividend. Superior offers the investor a dividend yield of 3.5%. When you back out the cash, the investor is getting a business capable of generating close to $2 a share in earnings next year for just over $10 a share. Like most auto suppliers, Superior's earnings can be both cyclical and volatile. In 2009 when auto sales plummeted and the Big 3 were in real trouble, Superior's revenues dropped by nearly 50%, and the company reported a loss. Because of this cyclicality, I believe that a conservative approach on the balance sheet is appropriate, but I don't think it would be a bad idea for management to pay out a special dividend due to the high likelihood of an increase in the dividend tax rate. Insiders own over 20% of the company so they have a vested interest in maximizing the after-tax take for investors. It also should be noted that even in 2009, Superior generated free cash flow due to some non-cash charges which effected GAAP earnings.
Currently U.S. auto manufacturers are in very strong financial condition after undergoing restructurings in bankruptcy court or otherwise. In addition the average age of U.S. cars is the oldest in its history, as many potential buyers have delayed purchasing new cars in the face of declining real estate values and high unemployment. Sales have improved markedly over the last several years, but we are still a good deal away from the levels of vehicles sold prior to the Great Recession. This should be a very strong environment for Superior Industries, because as sales increase over the next couple of years, profits should expand and the company's strong financial condition should only improve. The calamitous environment in 2008-2009 forced Superior to take aggressive actions to rein in costs. Some of these actions included plant closures in the United States and layoffs of 665 employees. Because both Mexican and U.S. plants make the same products, Superior is able to shift production based on whichever plant offers the superior economics. That has skewed revenue production towards the Mexican plants where over 60% of revenue is generated, and the number seems to be growing. Currency risks are certainly an issue for Superior and have hurt earnings more than they have helped in the past, due to the Peso's rise against the U.S. dollar over the years.
Aluminum wheel manufacturers are in a competitive industry, as is true with many auto supplies markets. Superior has been in the business for quite some time and has strong relationships with its key customers. If the U.S. auto manufacturers didn't recover as strongly as they have, I'd be very concerned due to the large percentage of Superior's sales that they account for. The company does do business with a variety of other international manufacturers and it is important that Superior continues to land deals for various lines of cars. Demand for aluminum wheels is affected by a number of factors in addition to total car sales, including pricing and performance comparisons to competitive materials such as steel. Due to aluminum wheels' superior performance and look, I wouldn't expect steel wheels to increase in market share in the near future. I believe that Superior would be an attractive acquisition candidate at current prices for a larger competitor that is interested in consolidating the industry somewhat, and benefiting from greater scale. I'm not sure at this time that management is really keen on the idea of selling out, but at some point down the line this provides a potential take-out premium for the patient investor.
Superior recently reported 3rd quarter earnings that were boosted by the resolution of a Mexican tax issue. Net sales of $193.926MM were down from $207.057MM YoY, but units were up. Superior usually passed through lower aluminum costs to its customers, therefore the average price was down versus last year to correspond with input pricing. Gross profit rose to $15.020MM from $12.575MM last year at the same time, while operating income was $9.060MM from $5.968MM. The income tax benefit was $5.174MM, so total net income in the quarter was $15.056MM, or $.55 per diluted share, up from $.16 YoY. For the first 39 weeks net sales were $611.436MM and net income was $28.204MM, up from $605.325MM and $26.982MM respectively, last year at the same time. Superior is a contract manufacturer in a competitive industry, so returns on invested capital are not likely to ever be stratospheric for sustained periods of time.
I believe the company can generate $1.50-$2.25 per share of normalized earnings over the course of an economic cycle. Management has kept the shares outstanding relatively consistent over the last decade, but perhaps it might not be a bad idea to look at buying back some stock with the large cash hoard. An enterprise value of about $283MM is just too cheap for a company generating between $50-$70MM in annual net income, and that is likely to see continued improvement in the U.S. auto market. I'd recommend buying the stock particularly on dips. One strategy an investor might use is to sell the July 2013 $17.50 puts for $1.75. Assuming Superior expires above $17.50 in 236 days, the investor will make 11.11% on the maximum risk of $1,575. This equates to about 17% on an annualized basis, and would put the investor in at a breakeven price of $15.75 if the stock is below $17.50 at expiration.