Superior Industries International, Inc.
/ (SUP-NYSE)/ Equity Research / SUP | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 05/17/2013
Current Price (05/16/13) / $18.11
Target Price / $19.00
SUMMARY
Superior Industries International faces significant customer concentration risk as the Detroit Big Three represent about 75% of its sales. The company saw a 28% decline in earnings per share to $0.18 in the first quarter of 2013 from $0.25 in the year ago quarter. Earnings per share were in line with the Zacks Consensus Estimate.However, the company has a strong product portfolio that is geared to suit current market trends. Revenues in the quarter rose 1.97% due to stronger sales mix. As such, we have upgraded our recommendation on the company’s shares to Neutral from Underperform and set a target price of $19.00./ Equity Research / SUP | Page 1
SUMMARY DATA
52-Week High / $21.8752-Week Low / $15.80
One-Year Return (%) / 13.08
Beta / 1.13
Average Daily Volume (sh) / 76,418
Shares Outstanding (mil) / 27
Market Capitalization ($mil) / $495
Short Interest Ratio (days) / 4.86
Institutional Ownership (%) / 65
Insider Ownership (%) / 15
Annual Cash Dividend / $0.32
Dividend Yield (%) / 1.77
5-Yr. Historical Growth Rates
Sales (%) / 7.3
Earnings Per Share (%) / 618.4
Dividend (%) / -1.6
P/E using TTM EPS / 20.8
P/E using 2013 Estimate / 26.2
P/E using 2014 Estimate / 25.2
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Small-Value
Industry / Auto/Truck-Orig
Zacks Industry Rank * / 33 out of 267
OVERVIEW
Founded in 1957 and based in Van Nuys, California, Superior Industries International Inc. (SUP) is one of the world’s largest designers and manufacturers of cast aluminum road wheels for the automotive industry. Superior Industries’ aluminum road wheels are sold to OEMs such as Audi, BMW, Chrysler LLC, General Motors, Fiat, Ford, Jaguar, Land Rover, Mazda, Mercedes Benz, Mitsubishi, Nissan, Skoda, Subaru, Suzuki, Toyota, Volkswagen and Volvo for their automobiles and light trucks. The company also produces certain accessory items for the automotive aftermarket. Out of the five manufacturing and distribution facilities of the company, two are located in Arkansas, U.S. (one owned) and three in Chihuahua, Mexico (all owned).
The company’s principal market is North America as the region consumes about 35% of its aluminum wheels used for passenger cars and light trucks. However, nearly 18% of its international demand is met through its North American facilities. The primary competitors of Superior Industries are U.S.-based Alcoa, Amcast Industrial, and Hayes Lemmerz as well as China-based DieCastal.
REASONS TO BUY
Superior Industries has a product portfolio geared to suit current market trends, thus making it the largest manufacturer of aluminum wheels for passenger cars and light-duty vehicles in North America. Aluminum wheels have outpaced steel wheels due to their lighter weight. Presently, aluminum wheels constitute almost 65% of total number of vehicles, and its increasing by 1% every year. For trucks, the ratio is 70%, while for cars it is in the high 50s.
Superior Industries has no bank or other interest bearing debt on its balance sheet. The absence of any long-term debt has allowed for full utilization of cash by investing in potential opportunities.
Strong sales mix is positively affecting the company’s results.
REASONS TO SELL
Superior Industries has significant exposure to the Big Three – Ford Motor, General Motors and Chrysler. The Big Three represent almost 75% of its total wheel sales.
The highly competitive nature of the automotive component supply industry will limit the company’s desirable growth plans in the coming years. Competition in the industry exists in terms of price, technology, product quality, delivery and overall customer service. Apart from the existing big players such as U.S.-based Alcoa, Amcast Industrial and Hayes Lemmerz, the company faces potential threats from newly formed companies, especially from the low-cost foreign markets such as China.
Superior Industries had a cash outflow of $12.6 million as of Mar 31, 2013 compared with a cash flow of $10.0 million as of Mar 25, 2012.
RECENT NEWS
Superior Earnings Fall but Meet Ests – May 3, 2013
Superior Industries Inc. posted a 28% decline in earnings per share to $0.18 in the first quarter of 2013 compared with $0.25 in the year ago quarter. Earnings per share were in line with the Zacks Consensus Estimate. Net income declined 26.7% to $4.9 million from $6.7 million in the year-ago quarter.
Revenues in the quarter rose 1.97% to $206.4 million, beating the Zacks Consensus Estimate of $199.0 million. The year over year improvement was driven by stronger sales mix. Unit shipments remained flat at 3.1 million units compared with the year-ago quarter.
Gross profit decreased 21% to $13.5 million or 6.5% of sales, from $17.1 million, or 8.5% in the prior-year quarter. The decrease was attributable to higher operating costs in the largest and oldest U.S. facility of the company and increased labor payments.
Selling, general and administrative expenses in the quarter rose 4.7% to $7.2 million or 3.5% of net sales, from $6.9 million, or 3.4% for the comparable period in 2012. Operating income declined 38.3% to $6.3 million from $10.2 million year ago, mainly due to a drop in gross profit.
New Facility
Superior Industries announced that it will construct a new manufacturing facility in Chihuahua, Mexico. It will invest around $125 million to $135 million for the construction of the facility. The facility has an initial capacity of 2.0 million and 2.5 million wheels annually. The company believes with the completion of construction of the facility by mid 2015 production capacity will improve by 15% to 20%.
Financial Details
As of Mar 31, 2013, Superior Industries had a working capital of $345.3 million, including cash, cash equivalents and short-term investments of $190.1 million. This compared with a working capital of $338.3 million, including cash, cash equivalents and short-term investments of $207.3 million. The company has no bank or other interest bearing debt at the end of the quarter.
VALUATION
Currently, shares of Superior Industries International Inc. are trading at 26.2 x our 2013 EPS estimate of $0.69. The company’s current trailing 12-month earnings multiple is 21.0, compared with the 17.6 average for the peer group and 17.1 for the S&P 500. Over the last five years, shares have traded in a range of 8.4x to 47.8x trailing 12-month earnings. The stock is also trading at a significant premium to the peer group, based on forward earnings estimates. The current P/E, which is close to the mean of the historical range, is at a 53% premium to the peer group for 2013. Our long-term Neutral recommendation on the stock indicates that it would perform in line with the overall market. Our $19.00 target price, 27.5x our 2013 EPS estimate, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
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DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of SUP. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1028companies covered: Outperform- 15.0%, Neutral- 78.7%, Underperform – 5.4%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
/ Equity Research / SUP | Page 1