The automotive industry crisis of 2008–2010 forced several producers and most sector suppliers to deeply restructure their operations, especially in the USA.
The government bailouts of both General Motors (GM) and Chrysler made the headlines, but several other companies had to go through a severe re-thinking of their activity, which often meant using Chapter 11 as a tool to reduce both their debt and their cost structure. In some cases, these companies also re-emerged under a new management team.
Does it make sense to look for good opportunities in these post-emergence entities? We believe so, and in this article we'll briefly mention two companies which may be worth a closer look.
You cannot talk about the automotive sector and post Chapter 11 stocks without mentioning General Motors. Here at Nortia Research, we are not great fans of the company. As the U.S. government is looking for the exit door and the UAW wants a bigger cut of Detroit's newfound profits, it's no surprise that the stock remains close to its lows. While many analysts underline the competitive multiples for the company (compared to its peers), we would rather turn our attention to stocks that may be less “visible” to the general public, but probably more interesting as turnaround stories.
Visteon (VC) filed for bankruptcy in May 2009. The company re-emerged in October 2010 with debt and other liabilities reduced by more than $2.4 billion. In January 2011 it began trading on the New York Stock Exchange.
A former Ford (F) spin off, and in the past considered, because of its roots, like a “not for profit” entity, the company is now a much better balanced entity, with Hyundai Kia Automotive Group (GM:HYMLF) representing its largest customers (29% of 2010 product sales), and Ford coming in second position with 25% of 2010 revenues. Asia is today the most important market (about 41% of sales in 2010), with Europe next at 39% and North America representing about 20% of its revenues.
The company has recently been in the news as George Soros took a position in the company with his Soros Fund Management.
Back in September 2010, before the company's re-emergence from Chapter 11, here is how Above Average Odds Investing was describing Visteon's investing opportunity:
After all, Visteon is an established and fast growing market leader with rapidly improving fundamentals and a sticky and above average customer base. Granted this isn’t the best business in the world, but given the nature of how the industry operates (LT contracts, etc.), the company does have a pretty defensible niche – especially given its improved financial position, revamped operations and its diversified client base (who are for the most part healthy and growing ).
Granted, most investors familiar with the company probably think of the company as it was in its pre-bankruptcy days – where the company had a bloated cost structure, a large amount of debt, a more concentrated customer base, and the majority of its business was derived from slower growth, lower margin U.S. and Western European markets. But that was then and this is now and as of today (i.e., post bankruptcy) the company is a very different animal as it possesses (we don’t think it ever hurts to reiterate it one more time) a lower “lean and mean” cost structure, a net cash position, a stronger, more diversified client base and best of all, the majority of the company’s business is now derived from rapidly growing, higher margin Asian markets.
The bottom line here is that the company is cheap, its fundamentals have clearly stabilized and it’s growing, margins are improving, and barring any worldwide catastrophe we think these trends will in all likelihood continue for at least the next couple of years.
An interesting way to analyze Visteon is to consider its value as a “sum of its parts.” Visteon owns a 70% interest in Halla Climate control (a publicly traded company in Korea) and a 50% interest in Chinese JV Yanfeng Visteon.
Back in June 2011, UBS estimated a $30 and $28 value, respectively, for Halla and Yanfeng, for a total of $58, a number that was very close to the where the stock was trading at that time. In other words, at about $60, it was like saying that almost no value was attributed to Visteon's core business.
Visteon's improved margins and relatively low valuation could also make the company an attractive target in case of industry consolidation.
The company hosted an investor day today for an update on Visteon's global operations.
Accuride Corporation (ACW) is one of the largest and most diversified manufacturers and suppliers of commercial vehicle components in North America. The company filed for bankruptcy in October 2009 and emerged from its Chapter 11 in March 2010. In December 2010 NYSE authorized Accuride Corp. for listing on the New York Stock Exchange.
Michael Song wrote a bullish analysis of the company, which is very interesting read:
Accuride is a LONG post-reorg story because of the significant rebound that is occurring in its North American trucking end markets, its meaningful operating leverage, its large competitive moat, the ability to exponentially increase its addressable market via international expansion and its ability to transfer value from debt holders to its equity holders as it uses its projected FCF to pay down debt. After enduring the worst trucking industry environment in history (2009A) and filing for Chapter 11, ACW has emerged with a clean balance sheet ($310mm notes due 2018 with no financial or maintenance covenants), more efficient operations ($60mm in cost savings at the 200K Class 8 levels) and unharmed operations (market share may have actually increased during the reorg process) due to its significant competitive moat. Management has provided conservative guidance that aligns with the low end of industry forecasts for medium/heavy duty trucks. However, based on Class 8 truck net orders for November 2010 – March 2011, not only does the low end of industry forecasts seem understated, the high end of the range may also be underestimating 2011E builds. ACW is poised to benefit from the ride back up the cycle as it has meaningful operating leverage.
Recently, the company acquired Forgitron Technologies, a company owning an 80,000-square-foot forged aluminum wheel manufacturing facility located in Camden, South Carolina. Accuride plans to convert the production of the facility to Accuride-branded aluminum wheels for the commercial vehicle market.
During the last conference call, Accuride reiterated its 2011 guidance:
(Click to enlarge)
Accuride reported net sales in the first quarter of 2011 of $218.8 million compared with $169.0 million in the prior year, a 29.5 % increase. The company reported a net loss of $5.2 million, or $(0.11) per share. Adjusted EBITDA in the quarter was $17.0 million and the company finished the quarter with $31.7 million of cash and cash equivalents. In Q1, Accuride had negative cash from operations of $40.7 million and capital spending of $13.8 million, resulting in negative free cash flow $54.5 million.
Given the fact that, apart from top-line growth, some Q1 metrics were not particularly exciting, and even assuming this is mainly a second half of the year story, there are good reasons to closely monitor Accuride's Q2 results, which came out yesterday, after market close.
While both companies meet our starting criteria (post Chapter 11 companies that strongly reduced both their debt and their costs, forced by a crisis that meant a strong decline in sales), and present an interesting upside as they still have the potential to increase production, in case the industry goes back to higher volumes (with obvious margin improvements), right now Visteon seems a safer bet, while Accuride is probably behind in terms of turnaround and the management team will have to deliver a few positive quarters before the market starts recognizing the company’s full potential.