Superior Inds Intl Inc (NYSE:SUP)

Ben Graham screen

Here is what is good about these guys: dominant market position in North American wheel market (31% of all aluminium wheels installed on passenger cars and light trucks in NA)

Here are the red flags in no particular order:

Quick problems:
1. Chairman, CEO, and President is the founder's son, founder just died at 87 (family owns 20%)
2. High customer concentration: 35% Ford, 30% GM, 11% Chrysler in volatile end market
3. Competitive price clauses make orders for multiple model years subject to profit margin compression (this is not a problem for more down stream auto parts suppliers, who can make niche products that get specked in and that are not expensive enough to negotiate over, so they stay high margin) - thus the low margins (7%) despite being at max capacity
4. Commodity exposure to aluminum (with steal being the substitute for wheels), steal is cheaper but heavier and less stylish
5. Large presence in Mexico (63% of total sales coming from Mexico operation)
6. Headquartered in California

Big Problem #1 - Global Procurement Practices
In their own words: “Increasingly global procurement practices, the pace of new vehicle introduction and demand for price reductions may make it more difficult to maintain long-term supply arrangements with our customers, and there are no guarantees that we will be able to negotiate supply arrangements on terms acceptable to us in the future. The contracts we have entered into with most of our customers provide that we will provide wheels for a particular vehicle model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model (usually three to five years), typically are non-exclusive, and do not require the purchase by the customer of any minimum number of wheels from us.”

Basically they are a regional provider in an increasingly international market. This makes sense, OEMs want to be able to put the same parts on their cars all over the world, so they look for international providers. Furthermore, the contracts these guys sign mean very little.

How are they able to compete internationally? Again in their own words...
"“the rapidly evolving nature of the markets in which we compete has attracted new entrants, particularly in low cost
countries. As a result, our sales levels and margins are being adversely affected by pricing pressures caused by such new entrants, especially in low-cost foreign markets, such as China”

Big Problem #2: Capacity
In 2011, they operated at full capacity. A note on the effect that has on their business, from them...
"In addition, we generally deliver our products only after receiving the order from the customer and thus typically do not hold large inventories. In the event of a stoppage in production at any of our manufacturing facilities, even if only temporary, or if we experience delays as a result of events that are beyond our control, delivery times could be severely affected. Any significant delay in deliveries to our customers could lead to premium freight costs and other performance penalties, as well as contract cancellations, and cause us to lose future sales and expose us to other claims for damages."

Big Problem #3: Competitive trends
Their competitors are a wide range of global automotive supply firms (Titan, American Axle), as well as the guys digging aluminium out of the ground, like Alcoa, who are looking to get into more downstream applications of their products. This puts pressure on from multiple angles.

Overall:
This business exhibits qualities that remind one of an under managed family business (surprise when considering who management is). The risk in going short it is that it becomes a takeover target. But why would a financial buyer want a business that needs significant capex investment to compete with bigger international companies and cheaper providers in foreign countries. Why would a strategic buy it when it can go after its share, considering that the contracts are not sticky and price sensitive. It certainly isn't crazy overpriced, 1.1x book value, 5.5x EV/EBITDA ($200M of cash), but 17.3x P/E (10.6x P/E when you net out cash). Keep in mind that Apple trades at ~6.0x P/E net of cash.

Since CAPS just needs to track behind the index to be successful, no doubt this one will lag. You can't grow when you are at max capacity. You can absolutely stumble when you are at max capacity, especially in Mexico. Seems like an under managed low quality business with low margin product.