We came across a bullish thesis on Superior Industries International, Inc. (SUP) on Substack by everyonehatespoetry. In this article, we will summarize the bulls’ thesis on SUP. Superior Industries International, Inc. (SUP)’s share was trading at $2.68 as of Nov 5th. SUP’s forward P/E was 3.67 according to Yahoo Finance.
A modern car on a highway, its wheels reflecting the setting sun.
Superior Industries is a global leader in designing and manufacturing aluminum wheels, supplying major automotive OEMs in North America and Europe, including General Motors, Ford, and Volkswagen, and aftermarket resellers in Europe. Their model involves transforming aluminum into wheels at facilities in North America and Europe, while avoiding risk on aluminum prices by treating it as a pass-through cost. Superior’s key metric for performance, Value-Added Sales, excludes aluminum costs, giving a clearer view of EBITDA margins, which are calculated on this basis rather than revenue.
The company’s stock has struggled since its 2017 acquisition of Uniwheels AG, a large German aluminum wheel manufacturer, which expanded Superior from a regional to a global supplier but burdened it with high leverage and a complex capital structure. The $715 million transaction added $660 million of debt and $150 million in preferred shares, forcing Superior to halve its dividend for debt reduction, which sent the stock sharply down. Subsequent industry challenges, including a rate hike cycle in 2018, weaker auto sales in 2019, and the COVID-19 crisis, intensified pressure on Superior’s financials and stock price, which fell into the $1-2 range.
A new CEO, Majid Abulaban, appointed in 2019, aimed to turn the company around. However, external pressures like the global chip shortage suppressed new vehicle sales and further stressed Superior’s volumes and capital structure. In early 2023, despite solid operational performance, the stock dropped due to minimal guidance revisions and rising interest rates affecting their variable rate capital structure. In 2022, UK-based M2 Capital made a buyout offer at $5.85 per share, but the deal has yet to materialize.
Superior’s capital structure remains complex, with $615 million in debt and $223 million in preferred shares. Yet, they’ve managed to generate stable EBITDA, even amid European aftermarket volume declines, showing a robust EBITDA margin on Value-Added Sales. Superior expects $120 million in operating cash flow, with plans to pay down $55 million in debt, potentially reducing interest expenses and preparing for upcoming maturities in 2025. The term loan refinancing seems feasible, though the preferred shares present a more pressing challenge, likely requiring an extension from TPG, their main preferred shareholder.
Despite high leverage, Superior’s earnings power is improving due to secular trends. Growth in content per wheel, driven by demand for lighter wheels for EVs and larger wheels for SUVs, has boosted margins. Superior’s ownership of all operational facilities offers potential for sale-and-leaseback financing if needed, adding resilience to their restructuring plans.
Superior Industries International, Inc. (SUP) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 6 hedge fund portfolios held SUP at the end of the second quarter which was 8 in the previous quarter. While we acknowledge the risk and potential of SUP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SUP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.