Will the New Ford Escape and Other Auto Developments Benefit Suppliers?
Ford (NYSE: F) recently unveiled to automobile enthusiasts the new design for the 2013 Ford Escape. In an attempt to appease consumer demand, Ford CEO Mark Fields stated that Ford is "injecting a style aspect to it, which consumers are saying, 'we want, [but] don't pull back one iota in the utility capability.'" As one of the first few vehicles to accommodate eco-friendly customers, the Focus continues to deliver performance with elegance. While people are saying that Ford will discontinue the Escape in the next few years for a new SUV model, consumers are currently satisfied with the technologies and utilities that it offers.
Regardless of what Ford plans to do with the Escape or with other vehicle models, it has been developing a solid consumer base. Since 2007, the company has successfully revamped its image in the public's eyes. By attempting to increase product quality in all aspects, American consumers as well as international consumers appear to be favoring the brand more and more.
Are there any companies that can benefit from Ford's operational success? The first thing that comes to mind is the variety of Ford's strategic partners. One strategic partner that investors may be interested in is Superior Industries (NYSE: SUP), a small-cap supplier that specializes in producing and distributing aluminum road wheels.
In light of Ford's strides in the recent years, Superior Industries may benefit along with the company, especially if a new line of SUVs becomes available in the next few years. To determine future possibilities, investors should consider what Superior Industries has done in the last few years first. While expanding exposure to automakers, Superior Industries' have been somewhat volatile. For example, the company's revenues topped in 2007 and dropped in 2008 and 2009, coming back up in 2010. This could be attributed to the financial crisis in 2008 and 2009, when automotive makers like GM (NYSE: GM) became dissolute and/or declared bankruptcy.
Despite the dire situations in 2008 and 2009, Superior Industries appears to have cut costs year over year to cope with declining revenues. As such, Superior Industries has been able to recoup losses and return to profitability in 2010. The thing that investors need to watch out for is the inherent volatility that comes with these companies. While Superior Industries is not alone when it comes to volatile sales and income numbers, some investors would like to see more reliability. For example, there is a lot of company-specific news that solely affects individual entities. However, this is more applicable to vehicle manufacturers like Honda (NYSE: HMC) and Toyota (NYSE: ™). For a "diversified" company like Superior Industries, a major slip-up in any one of its clients can hurt earnings.
Unlike many vehicle manufacturers, Superior Industries' cash flows from operations never became negative. Despite dropping from $68 million to $22 million in 2009, the company has been able to free up cash by regaining a positive net income figure and improving certain aspects of working capital. Moreover, it seems to have accrued about $22 million in receivables in 2010; which means that a large cash boost may occur in 2011 if its debtors pay it back. On the other hand, its inventories have piled up significantly in 2010, preventing about $26 million in potential cash inflows. This may or may not be a signal of future slow downs in sales and asset turnover.
Cash flows from investing activities has been positive in 2010. The reason appears to be from hedges made in 2009. Moreover, the company ramped up hedges in 2010. Interestingly, capital expenditures in property, plant, and equipment have been ramped down. Like inventories, PP&E expenditures may be a sign that things are slowing down for the company. Lastly, Super Industries seems to be continuously paying dividends. Depending on its operational abilities, continuous dividend payments may or may not be the best idea in the future.
While cash and other current assets increased, depreciation took its toll on PP&E. Ultimately, assets increased slightly in 2010. However, short-term accrued liabilities increased at a higher rate than all asset classes. On the flip side, long-term liabilities shrunk significantly. What did increase significantly is retained earnings, directly adding value to shareholders.
If investors are interested in taking advantage of the auto industry, Superior Industries may or may not be an interesting pick. While the company gives investors diversified exposure to various automotive heavyweights, any volatility in these companies affects Superior Industries significantly. Investors should learn more about its distribution channels and who they cater to specifically.
Superior Industries is currently trading at about $16.25, down about 23.5% for the year.
Traders who believe that Superior Industries is an appropriate long investment might want to consider the following trades:
- Super Industries has clients across the entire automotive production industry, like Honda, Toyota, Ford, and GM. It also caters to smaller auto motive manufacturers, giving investors wide exposure.
- Ford's plans for its SUV line of vehicles requires a stylistic overhaul, which may mean more business for Superior Industries.
- Many automotive manufacturers are experiencing positive reactions from consumers, and slow downs in the sector does not appear to likely.
Traders who believe that Superior Industries is more suited for a short play may consider an alternate position:
- The company's growth has been extremely volatile over the last five years; affecting aspects like revenues, cash flows, and balance sheet growth.
- Superior Industries product offering is extremely low, specializing only in aluminum wheels. In the event the industry seeks other types of materials, Superior Industries could be run out of business.
- Superior Industries does not seem to be turning over inventories and other assets in a timely manner, which may mean that its business is slowing down rapidly.
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