ACW - Accuride

[krazeenyc]

I've kept my eye on ACW over the last few years. And after plummeting 30+% post earnings - I've finally took the dive and started to build a position. It's now a decent sized position.  (I'm going to be brief since I'm short on time). 

 

QUICK rundown:

 

ACW is a leading manufacturer of commercial vehicle components.  Their products include steel and aluminum commercial vehicle wheels, wheel-end components and assemblies, truck body and chassis parts, and gray, ductile and austempered ductile iron castings.  They operate under the brands Accuride wheels, Gunite and Brillion. 

 

This is not a steady business. There are tons of peaks and valleys. If you're looking for a company that has steadily growing earnings or a high degree of certainty over the short term Accuride is not for you.

 

This is the quick and dirty on why I'm invested in Accuride. Accuride is extremely cyclical -- but the cyclicality is based on the replacement cycle for commercial trucks.  During the recession as companies cut costs they've waited longer and longer to replace these vehicles. At some point soon (assuming the economy continues to recover) this demand should return and it should be HUGE. Demand in this business turns and ramps faster than most businesses I've seen. Accuride's challenge is to run the business as  cost effectively as possible during the down cycles while still being ready to meet demand when business ramps -- this is something previous management was not too good at.

 

I'll try to post more if there is any interest.

 

 

[jschembs]

I haven't spent any time looking into ACW, but if they have much exposure to class 8 trucks, most data I've encountered suggests we're on the down slope of the current cycle, so the next couple of years may be difficult.

[17thstcapital]

Thanks for the writeup.

 

You didn't mention any multiples/valuation metrics so would be helpful if you shared some numbers.  What do you think the stock is worth when business/cycle ramps up?

 

Based on my model, the Company trades 3 turns more expensive to comps so I wonder why you think now is the right time to get involved here.

[krazeenyc]

Thanks for the writeup.

 

You didn't mention any multiples/valuation metrics so would be helpful if you shared some numbers.  What do you think the stock is worth when business/cycle ramps up?

 

Based on my model, the Company trades 3 turns more expensive to comps so I wonder why you think now is the right time to get involved here.

 

I value ACW at 7-8x EV/(Normalized EBITDA). My model has normalized EBITDA at $100 million (I think this is conservative).  ACW has $330 Million of Debt  and is currently trading at an EV of  $490 million. Current stock price $3.41 -- upside $7.80 - $10.00 appx. 

 

I know that $100 million "normalized" EBITDA may seem like a stretch when this years' EBITDA is going to be under $50 million.

 

Even though demand is currently down, their business is in a much better position than it has been.

 

- If you look at segmented EBITDA, you'll see that each division as well as the overall corporate structure are much more lean and efficient.

 

- They've built up their capacity and efficiency for when demand increases.

 

- Management (current CEO as well as other has an excellent track record in previous turn around (American Axle)

 

- For those that care about that kind of thing Cetus Capital and Coliseum capital have both been heavy buyers before and after the recent disappointing earnings announcement.

 

- It looks like October 2013 class 8 truck sales are way up (above expectations) 25.9k vs 18.7k in (sept) and vs 22.8k (last oct).  Keep in mind this is during a month where there was a government shutdown.

 

[PullTheTrigger]

There is typically a spike in October for class 8 truck sales because October is year-end for Navistar and there tends to be an increase in their October sales to meet whatever numbers they are trying to hit.

 

If November and December continue at the same pace as October, the 2013 class 8 truck build will be a little over 7% lower than 2012. Estimates for 2014 are about 8% over 2013 and 2015 is forecast to be a little over 6% above 2014. (I work in the industry).

 

Most of new truck sales have already bounced back significantly from the 2009 recession levels. Fleets have already lengthened their trade cycles.

 

Do the kinds of increases I mentioned account for your significant increase in demand at Accuride?

[krazeenyc]

There is typically a spike in October for class 8 truck sales because October is year-end for Navistar and there tends to be an increase in their October sales to meet whatever numbers they are trying to hit.

 

If November and December continue at the same pace as October, the 2013 class 8 truck build will be a little over 7% lower than 2012. Estimates for 2014 are about 8% over 2013 and 2015 is forecast to be a little over 6% above 2014. (I work in the industry).

 

Most of new truck sales have already bounced back significantly from the 2009 recession levels. Fleets have already lengthened their trade cycles.

 

Do the kinds of increases I mentioned account for your significant increase in demand at Accuride?

 

I don't work in the industry, but the October order spike to 26K class 8 trucks is much greater than expected no? (also I have no real idea about when demand will boom and bust, but I expect ACW to be better positioned for both than in the past).

[PullTheTrigger]

I wouldn't make a trend of a one month spike. I'll check back in when I get November data.

 

I was trying to convey that we've already had a significant new truck rebound since 2009 with forecasts expected to show relatively little growth in the next few years.

 

 

[cayale]

Why does this company deserve an EV/EBITDA multiple of 7-8x normalized?  I've tried to warm up to it in the past, but it is a tough, tough business.

[PullTheTrigger]

Just following up with November U.S. Class 8 truck sales. They are down 19% from October. Annualized, 2013 will be down about 7.5% from 2012.

 

Note that Navistar was down 41% in November over October. They obviously book a lot of sales in October for year end.

 

 

[yadayada]

I wrote this idea out, and the upside looks pretty huge. Could be between 10-20$. The average age of class 8 trucks is still 6.5 years. The median the last 25 years was 5.8 years. What's interesting is that replacement costs skyrocket when you get in the 6 year area. There is also a shortage of truck drivers. And its easier to get drivers if you have a newer fleet of trucks.

 

Another thing to factor in is fuel costs. could be another 2-10% of savings, depending on age.

 

Now the numbers.

http://2.bp.blogspot.com/-8NpqMu60Ylg/UrnmeTKiJkI/AAAAAAAAACg/9fBHlZvRJCQ/s1600/ACW.jpg

They were ill prepared for the last 2 years. They had an entire new management come in, and had to change up and close and consolidate some factories. And win back customers. going in 2014, there will be some more cost cuts because of consolidation. Where they falled short in the pre crisis cycle is that they couldnt meet demand when things got going. So now in bad times they do worse, but if it starts ramping up again (which should be within 1-3 years really) then they will make large bank.

 

if you look at the segments:

http://4.bp.blogspot.com/-erYj_KcCKUw/UrnpKBfm7EI/AAAAAAAAACs/PIohop9nRmQ/s1600/ACW1.jpg

Their wheels segment is always profitable. But their Gunite and brillion start getting really profitable at a certain point. Probably at 600 million$ in revenue they will be break even or so. Maybe slightly cash flow positive. But once they start getting their lost customers back and the replacement cycle starts to go in full force they can do 50-100 million$ in net income. Implying 3-5 bagger really. And i expect this to happen within a few years, given that average age of trucks is still really high.

 

I think coliseum thinks it can be even more. They were buying at 5$. And insiders were buying at around 10$ in 2011. So even if you have to wait for 2 or 3 years, this stock will explode as soon as the replacements start happening.

[kirkomi]

How do you get comfortable with the debt here ?

[yadayada]

honestly with 2 funds holding a stake this large, and one actively involved, Im not too worried about that.

http://www.streetinsider.com/Corporate+News/Accuride+(ACW)+to+Nominate+Cetus+Capitals+Davis+for+Board+Seat/7962656.html

 

they also both bought alot more when it crashed below 4$.

[radioheadok3]

Congrats to those of you with the huevos to invest in this one. I looked at it superficially and was disgusted, should have been my cue that it was interesting. I heard a quote the other day that a value investor should be able to look at their portfolio and want to vomit a little. This one qualified for me...

[yadayada]

ìmo at these prices it still looks very attractive. they can generate close to 100m in cash a year if the replacement cycle starts kicking in.

[krazeenyc]

I still like ACW. As the numbers indicate they've clearly made some major improvements in terms of the efficiency of their business. Their break-even point is much lower today than it was a year ago. That part of my thesis seems to have played out.

 

They now need to regain previously lost market share and hopefully their end market conditions improve -- there is definitely execution risk here.  I've pared my position slightly today, but am still quite long the name. 

[yadayada]

http://www.courierpress.com/news/2013/jun/21/accuride-to-invest-58-million-in-henderson-02/

 

Some interesting details. Looks promising.

 

what is nice is also that they are now FCF positive. you might think that machines are being depreciated, but when they are not used in a down cycle they can be used for longer. And most of the restructuring investments have been made now.

[yadayada]

Do i have this right? sales are 668 million annually according to first quarter results. When the replacement cycle starts kicking in , they can reach north of a billion$.

 

vhttp://globenewswire.com/news-release/2014/04/28/630448/10078507/en/Accuride-Reports-First-Quarter-2014-Results-Continues-Positive-Momentum.html

 

Ebitda for wheels (which seems non cyclical) is 19.2 million + 4.3 million for Gunite and 2.4 mllion$ for Brillion. So that is 25.9 million ebitda last quarter. Which is 100 million in ebitda annually when the replacement cycle still has to kick in.

 

Interest is 35 million$, and they pay no taxes because of their NOLS. Depreciation is 35 million$. But they invested in new equipment already, so actual capital expenditures is more like 25 million$ going forward.

 

That would be about 40 million$ in free cash flow, on a 200 million$ market cap. With an option if the replacment cycle kicks in. Which seems like because average truck age for most classes is at like all time highs.

 

Do i have this right?

 

Ebitda last year this time was about 68 million -35 million in interest - their huge capital expenditures because they operated with ancient equipment (last management put off replacing their machines for too long). So they didnt make anything.

 

Sales barely increased, but they went from break even to now 40 million (or more in FCF).

 

Expect the stock to pop on this news.

[yadayada]

edit

[yadayada]

Ok so i forgot to factor in corporate.

 

Op income was 6.5 million last quarter (but they replaced all their machines recently, so maintenance capex should be lower). There are still some cost cuts left, and their wheels section is expected to grow + margin expansion. They now sell wheels that last twice as long (4 instead of 2 years) due to a new coating they have 7 year exclusivity on. So i think here you will see margin expansion soon, and increased revenue.

 

Wheels is largest and most stable part (due to short lifecycle).

 

Debt is due in aug 2018. The thing is tho, all truck fleets are at all time highs still. If it ticks down even a litttle bit, debt is gone within a year or 2. So this seems less risk then market thinks. Also if the market ticks up for truck parts , they should take some market share probably, as they are really well positioned now to take a lot of capacity.

 

If you think this is a bad bet, you basicly think fleet age will not start ticking down within the next 4 years.

 

If they survive and refinance/pay off or both, FCF could be 40-50 million in a bad market, and several 100 million in a good market with little debt. Market cap is now 250 million$. So it comes down to if you think replacement cycle will start to kick in within the next 4 years. If anyone can find a break down in age for trucks? If a lot of class 8 trucks are close to 10 years old (their usefull life), then risk should be very low here. But I cannot find these specific statistics.

 

 

 

I think average age of light trucks is now 11.3 years, and average age of class 8 trucks is 6.5 years.

 

Fuel effeciency of new builds for light trucks went up like 18% in the last 10 years I think. And it is still going up each year. So at some point it stops making sense to use these old trucks due to high maintenance and really abd fuel efficiency. Even if the economy isnt exactly rocking.

 

link for average age and fuel efficiency:

http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/index.html

 

And even if they have to refinance somehow or issue stock, it wont screw shareholders over. 2 hedgefunds own a large part here, and that should protect interests of minority shareholders somewhat right? You probably see a rights offering or some sort of thing. The underlying business is of high quality, it was just mismanaged and took on too much leverage before their last chapter 11.

 

 

http://www.inboundlogistics.com/cms/article/smarter-trucking-saves-fuel-over-the-long-haul/

 

 

The tipping point doesn't seem far off. "The nation's truck fleet is as old as it has ever been," says Roeth. That's because, in hard economic times, fleet operators are keeping trucks longer. But new purchases can be postponed for only so long, and an influx of new trucks will hit U.S. highways within the next few years, according to Roeth.

And that quote was 2 years ago, while average age still shot up over those 2 years.

 

Anyway, can anyone shoot holes in this?

[Libs]

Yada

 

Re the below, from the 10-Q-

 

Why were sales only up ~3% given the industry conditions noted below?

 

------------------------------------------------------------

 

Industry Conditions

 

Net orders for the Class 8 and Class 5-7 commercial vehicle segments that Accuride supplies posted strong gains in the first quarter, growing 35.3 percent and 20.4 percent, respectively, year-over-year.  Strong fleet profitability and aging equipment are fueling the replacement trend.  Meanwhile, trailer orders stand at their highest level since August 2006.  As a result, first-quarter Class 8 and Class 5-7 production increased 22.1 percent and 12.2 percent, respectively, over the first quarter of 2013, while trailer production was essentially flat year-over-year.  Based on the continued strong order rate, we anticipate higher OEM build rates over the next few quarters, particularly within the Class 8 segment.  Demand in Brillion's core industrial end markets, however, remained soft in the first quarter and is not expected to recover until 2015-16.

 

[yadayada]

I think that is orders? That probably means revenue will be recognized later right? Im not sure how long production time is. I supose you could check by looking at inventory turn over. It seems that part of the reason this is not oursourced to China is because of timing and quick delivery. Because there are a lot of custom parts, truck manufacturers dont want to sit with a large inventory, but also need their parts right on time obviously.

 

fwiw, from Q call:

Well, I think if you remember, Jimmy, when we hosted everyone at Rockford a couple of years ago, what we were targeting was a 10% to 12% ongoing business for Gunite. So it wasn't really quarterly as much as kind of on a full quarter basis. So to hit that in the first quarter to be right at 10% is online with what we're thinking. In regards to incremental margins, if we're able to capitalize and get more revenue, I think as normally expected, we'll be somewhere in the 25% range, 25% to 30% for Wheels and in the 20% to 25% for Gunite.

 

Currently they do like 650 million? If it ramps up to like 950, that is with 20% gross margins and 45 million in SG&A like 145 million in operating profit (they have NOLS). I assume they will refinance asap if it ramps up.

 

If they can get to like 1.1 billion (they did 1.4 bn$ previously), with 25% gross, and assuming like 65 million in SG&A (highest was 56m$ with more fat), that is nearly 200 million after interest.

 

 

[Libs]

<The tipping point doesn't seem far off. "The nation's truck fleet is as old as it has ever been," says Roeth. That's because, in hard economic times, fleet operators are keeping trucks longer. But new purchases can be postponed for only so long, and an influx of new trucks will hit U.S. highways within the next few years, according to Roeth.

 

 

And that quote was 2 years ago, while average age still shot up over those 2 years.>

 

Yada

 

Thanks for your comments here.

 

This suggests the average age has declined, not gone up over the past 2-3 years ( although still > average):

 

http://www.overdriveonline.com/aging-u-s-fleets/

 

this suggests sales are not really that low, historically. See the chart entitled 'class 8 graphs' on the left.

 

http://www.actresearch.net/wp-content/uploads/2013/04/soi1212.pdf

 

Are you being too optimistic about a rebound? I've read that 250K class 8 production / year is replacement level, and we are at that level now.

 

 

 

[yadayada]

your first graph is forecast 2013. Actual 2013 was same as 2012. Given that fuel efficiency is improved each year, they will have to become a bit younger sometime soon right? Especially with rising fuel prices. Usefull life of a class 8 truck is about 10 years, so 6.5 years seems pretty old.

 

And one third of their (non wheels I think?) revenue is light trucks. I added excel so you can see age went up every year. They are now more then 11 years.

 

Also their wheels segment will probably get a tailwind. And there is some margin expansion left (even without growth). ALso it seems unlikely they will be wiped out with 2 hedgefunds (one who made a killing on this one in the 90's as well when av age of class 8 was 6.3 years) owning such large stakes. All insiders have increased stakes as well over the past few years.

 

And another thing you have to consider is that there was a big gap of orders after 2007 (from page 18 on your document). And the total demand for these class 8 trucks has been rising since the 90's. Average was 6.3 years in early 90's (when Romney's fund made a killing with ACW). And they had a great boom in orders. New orders have been lagging, and economic activity is greater then the 90's, so technically we are in for a larger spike in orders sometime soon because of the greater pent up demand. Even if that waits, they are not that big of a part of revenue, and it is unlikely the fleet will get older, so there is not much downside in that part of the business.

 

Also I think once they show that they can also make money right now, and pay off some debt, they can refinance?

table_01_26_1.xlsx

[Libs]

Interesting, thanks.

 

You may be right....here's the latest production for class 5-7, 8:

 

http://www.todaystrucking.com/class-8-truck-production-rising-class-5-to-7-falling

[yadayada]

and the reason they are so cheap is probably because when new management came in, they started restructuring right when the market picked up a bit and they werent ready for it. Also the debt scares people off (and lack of net earnings) and the market thinks it is cyclical. And we're on the (perceived) tail end of a bull market. But it is really replacement driven, so not that much depends on an economic boom.

 

So if you tick these off, some are not even true now, and some are not a great cause for concern. Just wish i could have bought a shit load at around 3$ last november :D .

 

I see this a lot, a few perceived threats and no one really wants it, and the price is super depressed. I really think that this year they will kill it, and show their first net profit in a while. It should be trading at like 7-8$ now in anticipation of that. But because of the dissapointments the market needs a killer quarter before it will start going up.

 

Would recommend reading some quarterly call transcripts, the CEO explains a lot of things really well that are not in 10Q or 10K.