ACW - Accuride

[no_free_lunch]

I like the idea and the effort you have put into it yadayada.  Similar to Libs, I just wonder if the cycle isn't already well advanced.  I have been digging at it a bit and there is some good and bad.  People talk about the last 5 years being tough, low margins, etc.  However I also see things like this.

 

Class 8 truck orders strengthened in May, marking the strongest month of May since 2006, according to preliminary figures from industry forecasters.

 

http://www.trucknews.com/business-management/mays-class-8-truck-orders-best-since-2006/1003057217

 

Calculated risk also has a chart on total tonnage and it is already well past it's peak from before the recession. 

 

http://www.calculatedriskblog.com/2014/05/ata-trucking-index-increased-in-april.html

 

I don't know,  it's not conclusive but it feels we're way past the trough anyways.  I do like the concept that there is a cost benefit to upgrading the fleet for fuel savings.  I have also seen evidence that despite the recent rise in sales, companies pulled back heavily during the recession, so it's possible that the fleet would be old.  It's just difficult to weigh it all out.

[yadayada]

I put all the stats in a excel file. But I cannot find orders for before 2005. And ACW also doesnt seperate their revenue and income v well.

 

Also apparantly light trucks is not class 5-7 trucks. THey are mostly medium trucks. But according to latest quarterly call presentation, average age of those does hover around 10 years now and has been rising over the past years.

 

What you also have to consider is, that if it ticks up even a little bit, they make a ton of money. So even if it only ticks up to like 800 million in revenue, they probably have like 15-20% gross margins? That is already 35-75 million after interest payments.

 

For age of class 5-7 trucks look on page 5 of Q1 presentation.

 

Also note from that presentation that there are some opportunities for their wheels section globally to expand. Especially with the new coating they will have this year. And there are also some costs left to cut (page 7). CEO has a lot of experience in this industry, and I trust the 2 hedgefunds are watching this closely so no value gets destroyed by cutting too much. Also the CEO constantly seems to emphasize that they are cutting costs v carefully and think long term. Allthough he might be full of shit ofcourse.

 

Also their wheels section is the money makers with the least variation in income (due to shorter replacement cycles of 2-5 years). The other segments are the cyclical ones, and management will try to keep them from losing as little as possible in down cycles.

 

Plus if you look here:

https://www.chicagofed.org/digital_assets/others/events/2012/aos/vieth.pdf

 

If you look on page 9, you have to take into consideration that fleet size in the US almost ddoubled over the last 20 years. So required orders to keep fleet from aging will go up each year probably. in 2005 and 06 orders were over 300k for class 8 (to get av age down). We havent seen that so far after that.

 

also page 11 is v interesting, there is a coming supply crunch of freight capacity. If you look at the number of trucks on the road, this is lower (double digit %) then 7-8 years ago,.

 

It is not all rosy if you read that report tho. Truckers are still v carefull to order new trucks and waiting for even higher freight rates. And there is also a shortage of truck drivers forming. There is shitty regulation makeing everything more expensive.

 

A positive is that with higher fuel prices, they will drive slower. And if they have to drive slower, then more trucks are needed to haul all the freight.

 

 

Anyway im not completely sure on this one. It looks relatively low risk. Also even if newbuilds are lagging, they also serve the aftermarket, and with equipment this old, more parts will need to be replaced in current trucks on the road. They also make money on that. ALlthough I cannot find % break down on this.

 

Plus there is a chance they capture market share from competitors who might not be able to handle all demand if the replacement cycle ticks up. And their exclusive new wheels may help them win some market share back in other markets as well.

 

Anyway im done here , typed out enough :) .

ACW_stats.ods

1Q14_Earnings_Presentation_FINAL.pdf

[yadayada]

Also

http://www.trucknews.com/business-management/mays-class-8-truck-orders-best-since-2006/1003057217

 

Class 8 orders, when annualized, amount to 343,000 units over the past six months, according to FTR.

 

in 2013, they were 245,000

 

edit: also found this, basicly all the statistics about oil fuel, fuel consumption, tonnage of freight carried by trucks etc. V interesting and relatively up to date up to 2012:

 

http://cta.ornl.gov/data/tedb32/Edition32_Full_Doc.pdf

 

A gold mine of information

[Spekulatius]

AXL looks equally cheap in terms if P/S, if not cheaper and has been showing better numbers and is already solidly profitable. I don't see a reason to go with ACW when I can buy a better company like AXL for the same P/S multiple.

[yadayada]

AXL serves light trucks. If you serve medium and heavy trucks parts are more customized, so margins are better (because of lower lead times). This is also harder to outsource. and at 1.5 billion$, I think a lot is priced in already. This one has a market cap of 250 million and can do about that amount in FCF. And if they cut some more costs and refinance debt, it is also cheaper when the replacement cycle is not kicking in. I dont see AXL doing anywhere near a billion$ in FCF.

 

AXL was great to buy last year tho at 10$, wish I saw it then :). Ill keep it on my watch list.

[Spekulatius]

AXL serves light trucks. If you serve medium and heavy trucks parts are more customized, so margins are better (because of lower lead times). This is also harder to outsource. and at 1.5 billion$, I think a lot is priced in already. This one has a market cap of 250 million and can do about that amount in FCF. And if they cut some more costs and refinance debt, it is also cheaper when the replacement cycle is not kicking in. I dont see AXL doing anywhere near a billion$ in FCF.

 

AXL was great to buy last year tho at 10$, wish I saw it then :). Ill keep it on my watch list.

 

How do you see ACW generating 250M$ in FCF. This is at best a 20% gross margin business. Maybe they can do a high single digit operating margin in a peak year. But to generate a 250M$ in FCF they would need to do north of 2B$ in revenue. If they grow that much, the FCF is probably negative due to the Capex and working capital required to grow the business volume. Their current revenue run rate is a bit more than 600M$, so these numbers require a huge leap in business.

 

Most car suppliers don't really generate good FCF, well maybe for a very short timeframe when the business stops growing and before it falls off a cliff.

 

I put ACW on my watchlist as well. I think it will get whacked very hard in a correction and probably drop below 4$. I do think it's a rebound candidate but I think 1B$ in revenue and 100M$ in operating profit is as good as it's going to get.

[yadayada]

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.

 

So with 1.2 billion in revenue, and assuming 20% gross margins, that is 240 million$. Then all is left is interest and G&A. G&A never seems to go above 55 million or so (40 million$ currently and they have some cost cuts left apparantly). This is a relatively fixed expense. They have NOLS, so no taxes. They have the capacity to do 1.2 billion$ without having to invest significantly. If you assume 25%-30% margins (wheels is largest segment) then it becomes even better. Given that management didnt really overpromise so far, I dont think this is too unlikely.

 

They did 1.4 billion$ revenue in 2006 or something. But margins were worse back then. And why do you think this one will go lower? Orders are up this year? It is cheap now, and wouldnt bet it will go any lower.

[yadayada]

Interesting, the CEO bought 600k$ worth of shares recently at around 5$.

[Laxputs]

With the recent 2q14 results, it looks like margins have improved, more efficient operation now. Positive earnings. But revenue increase confirming uptick in cycle just not there?