is on a roll. This leading manufacturer of aluminum automotive wheels continues to post solid results, supported by a strong balance sheet and shrewd management. Even in this cyclical business, Superior has found ways to prosper throughout the cycle.
Although 2001 was a tough year for the auto business, Superior has recovered quickly. A major sales push from its primary customer,
, which makes up nearly half its sales, helped Superior post year-over-year earnings growth in the first quarter, surprising analysts.
Business could get even better. Aluminum wheels are growing in popularity, and Superior's strong engineering capabilities have helped it to grab market share from competitors.
It's also seeing growth from
, which added aluminum wheels to the Expedition base model and to the new Lincoln Aviator. Superior also has added new contracts with
. Besides contributing to overall growth, the new contracts will lighten Superior's dependence on GM.
The growth in demand has created a backlog that should keep sales climbing at a double-digit pace over the next two years. To meet demand, Superior is expanding its Mexico manufacturing facilities, which should boost North American production by 24% this year. An expansion at its Rogers, Ark., plant will increase production an additional 7% late next year.
Management is also considering expansion in both its Far East and European manufacturing operations, noting opportunities for new contracts in the Far East and the ability to export products. In Europe, Superior appears more deliberate, engaging a joint venture partner and focusing on profitability rather than market share.
Superior should post second-quarter earnings of 69 cents a share next Thursday, and should push guidance higher for the year. The current First Call consensus earnings estimate is $2.68 a share for 2002. I expect that number to move closer to $2.70 after the company reports. The 2003 consensus stands at $3.40, which should rise to $3.50 or better, above record 2001 earnings.
The company should be able to grow revenue at an average of 10% to 12% throughout the cycle, with 15% at the peak and about 5% at the trough with earnings keeping pace.
Kicking the Tires
Perhaps Superior's greatest strength is its superior balance sheet. The company has no debt and had $99.5 million in cash at the end of the first quarter. That's after $40 million in capital spending plus a common stock dividend, which the company has increased an average of more than 11% in each of the past five years.
The company should generate an additional $50 million in free cash this year, some of which will be applied to a share-buyback program. However, a conservative management team led by Chairman Lou Borick seems content to keep a decent level of cash for rainy days in his cyclical business.
The most significant risk to Superior is a sharp downturn in the auto cycle. While Superior's backlogs provide some protection, gross revenue and margins would feel the pinch of any contraction in the automotive business. In addition, suppliers are always subject to the pricing pressure from the large auto manufacturers, although the growing interest in aluminum wheels and other products affords Superior a level of pricing power.
Finally, Superior is carefully expanding into ancillary businesses such as aluminum suspension products and other lightweight components. While the new products will generate modest revenue, they'll remain a slight drag on profits through at least 2004. New product development always carries execution risk, and production glitches could impact Superior's bottom line.
Superior is among the elite original equipment manufacturers and trades at a slight premium to the group. That premium is deserved, based on Superior's growing market share and revenue, debt-free balance sheet and focused management. A better-than-expected second quarter and a positive outlook should get investors' wheels turning.
I like Superior and its prospects. I give it three wheels -- make that barrels. For an explanation of our barrel rating system,
see our description.
Lots of action in the barrel this week.
-- the only barricade-rated stock in the portfolio -- warned it would miss earnings and slash jobs. On top of the recent
Securities and Exchange Commission
inquiries, the market didn't like the news, taking the stock down more than 65%. With all the uncertainties, it remains a stock to avoid.
Last week's analysis touched on
issues, and little has changed there as well.
A number of names have been moved around in the portfolio.
Cost Plus World Markets
is now in the top, "above average" category. Sales are tracking well, especially in California, where comps appear to be turning slightly positive. Plus, the new East Coast distribution facility is operating, making eastern U.S. distribution more efficient.
moves to the "average outlook" list, as I don't see an immediate catalyst for the shares. However, I still like SurModics as a way to play the coated stent market and would not be surprised to see the stock move slightly higher if next week's earnings are upbeat. That said, there's a slight risk if the company is subdued in its revenue outlook from European stent sales.
are both moved to the "below average" outlook list. Hines simply never gained traction during the spring planting season and isn't likely to see a big boost now that the peak of the gardening season has passed.
Arch remains a solid company, but I have concerns about potential overhang from news flows over the company's production of CCA pressure-treated lumber and the 2003 ban on lumber treated with arsenic, an active ingredient in the CCA treatment process.
Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies, and your full name and hometown. If I profile your suggestion, I'll send you a TSC gift to commemorate your pick.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to