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Superior Industries: An Undervalued Leader in Aluminum Wheel Manufacturing

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Founded in 1957 in Southern California, Superior Industries International Inc. (NYSE:SUP) has grown to become one of the largest light vehicle aluminum wheel suppliers in the world. Currently headquartered in Southfield, Michigan, Superior operates nine manufacturing facilities and employs approximately 8,000 people in North America and Europe. Superior has the expertise and technology to deliver the latest wheel trends and finish varieties. The company continues to pioneer innovative light weighting and finishing technologies to meet its customers' needs. Aluminum wheels sold to original equipment manufacturers (large automobile manufacturers) accounts for about 90% of sales.


Company history

Superior has a storied history in the automotive industry and manufacturing circles. Founded initially to make radiator bug screens, the company has grown to be the largest aluminum wheel manufacturer in the world and the principal supplier of cast aluminum wheels to the North American automotive industry. Superior designs, manufactures and markets automotive products for both the OEM market and for the automotive aftermarket. The company specializes in custom road wheels as well as steering wheel covers, lighting products and suspension products.

In 1957, Louis Borick established Superior Industries to manufacture and supply popular products for a burgeoning automotive aftermarket. The company set up its headquarters in Van Nuys, California and Borick, who had become a car fanatic as a teenager after landing a job in a Minnesota auto parts shop, became president and chief executive of Superior.

In 1961, the company constructed a new, 25,000-square-foot manufacturing plant in Van Nuys, and the following year it introduced its second major product, safety belts. During the mid-1960s, Superiors product line was expanded to include other automotive aftermarket products, such as steering wheel covers, custom steering wheels and spring and suspension systems.

In 1967, Superior added plating facilities to its manufacturing operations and began producing chrome-plated steel wheels for the automotive aftermarket. Riding on the success of its chrome wheels, Superior became a public company in 1969, offering an initial 320,000 shares of common stock, with the proceeds going toward reducing bank debt.

By 1994, continued demand for Superiors wheels and the passage of the North American Free Trade Agreement led Superior to open a manufacturing facility outside of the U.S. in Chihuahua, Mexico. This provided the company with significant additional capacity for its expansion. Over the course of approximately 20 years, the company continued to open new facilities in Chihuahua with the most recent facility opening in 2015, bringing Superiors total footprint in Mexico to four facilities with capacity over 10 million wheels per year.

On May 31, 2017, Superior acquired Uniwheels Group for approximately $715 million. This transformative combination created one of the largest providers of aluminum wheels for the automotive market with a highly-diversified customer base, a broad array of value-added products, significant geographic breadth and a platform for development of new technologies.

Financial review

The company had a strong 2021 with revenue increasing 25.8% to $1.38 billion. Gross profit increased almost 75% to $114.7 million. The increase in gross profit was primarily due to higher shipment volumes and favorable product mix. Operating income was $55.4 million, compared to adjusted operating income of $13.2 million in 2020.

Net income for the year was $3.75 million, but it recorded an earnings loss of $1.17 per share due to accretion of preferred stock charges and the payment of preferred stock dividends totaling $34 million. Those items are not included in the calculation of net income.

Balance sheet

The acquisition of Uniwheels in 2017 was financed with debt, much of which still remains on the balance sheet today. As of the end of 2021, cash and equivalents totaled $113.5 million, while total debt stood at $608.4 million.

The company did not generate free cash flow in 2021 as a result of higher working capital requirements due to the increased cost of aluminum during the year. For 2022, the company is expecting positive free cash flow.

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Valuation

Analyst earnings per share estimates for 2022 and 2023 are approximately 55 cents for both years. The companys Ebitda guidance for 2022 at the midpoint is $175 million. With an enterprise value of $610 million, the stock is selling at a very cheap enterprise value/Ebitda valuation of 3.5.

Conclusion

Superior Industries appears to be very undervalued at these levels. Meaningful upside may be possible as the company continues to perform well and reduce debt levels over time, which will benefit equity shareholders.

This article first appeared on GuruFocus.