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Thursday, May 26, 2022

Superior a Consistent Earner But Wall Street Uninterested

At a time when investors seem entranced by sexy dot-com companies, Superior Industries International Inc. looks like the wallflower at a Wall Street dance.

Superior, widely considered the world’s largest manufacturer of aluminum wheels for the automotive industry, has seen its stock languish in the mid-$20s for the last several years, despite decent dividends and an aggressive stock repurchase program.

What the Van Nuys company lacks in sex appeal, however, it makes up in stability.

“It’s boring, it’s mundane, it’s not an Internet company,” said Seth Feinstein, an analyst with Crowell, Weedon & Co. in Los Angeles. “But Superior has an outstanding long-term record, a solid balance sheet and a good price-to-earnings ratio.”

Superior Industries controls about 35 percent of the domestic market for aluminum wheels, selling to the likes of Ford Motor Co., General Motors Corp., BMW, Toyota Motor Corp. and Nissan Motor Co. Ltd.

In the past six months, the company has cinched $300 million in contracts, including a deal to supply wheels for the Focus, Ford’s next-generation Escort.

“About half of that ($300 million in orders) was replacement business, but the other half was new orders,” said Jeffrey Ornstein, Superior’s chief financial officer. “We expect to see a 25 to 30 percent increase in unit shipments over the next three years.”

To meet increased demand, the company is expanding three of its eight wheel production facilities, including its plant in Van Nuys, and plans were announced earlier this month to build a ninth plant, adjacent to an existing Superior Industries unit in Chihuahua, Mexico, at a cost of $50 million.

“The light-truck and SUV market has just been phenomenal,” said Steven Borick, vice president of strategic planning and son of company founder Louis Borick. “When consumers look at automobiles today, they want to be proud of what they own. They want aluminum wheels.”

The consumer demand for snazzy wheels is fueling profit growth.

For the third quarter ended Sept. 30, Superior reported net income of $14.5 million (54 cents per diluted share), compared with $7.7 million (28 cents) for the like period a year ago. Revenue was $131.4 million vs. $112.2 million.

The 89 percent increase in third-quarter net income is exaggerated somewhat, analysts point out, because the company had an unusually poor third quarter of 1998 due to a GM strike, which cut deeply into sales.

Louis Borick, a college dropout and former used-car salesman, founded Superior in 1957 after moving to California from St. Paul, Minn. and opening a 4,000-square-foot plant in North Hollywood to make accessories for automobiles.

Borick started out making bug screens for cars popular items in the bug-prone Midwest. But he soon realized that California doesn’t have as many bugs, and his company eked out a meager $26,000 in sales its first year.

Borick, who is still active at 76 as president, chief executive and chairman, turned instead to making inexpensive items for the auto aftermarket, such as wind deflectors and overload springs.

In response to a changing regulatory environment in the early ’60s, Borick started making seatbelts. Revenues grew to $2.3 million in 1962. In the mid-’70s, he got his big break: a contract from Ford to build aluminum wheels for the Mustang. Revenues climbed to $43 million in the first year of the contract.

Despite the company’s solid track record and strong balance sheet, analyst Brett Hoselton of McDonald Investments Inc. has a “hold” on the stock. Among his reasons: shares are trading at about a 13 percent premium to its peers in the industry and it has a rather conservative 8 percent annual growth rate, compared with 16 percent for the industry.

While a “hold” rating is sometimes considered to be a euphemism for “sell,” Hoselton insists it’s not the case with him. “It’s a dynamite company with dynamite management,” he said. “With this company, you’ll see slow and steady growth, but it’s more like a tortoise than a hare.”

Feinstein believes the company is on the cusp of an up cycle because it continues to pick up market share, mainly from competitors that can’t provide the quality and consistency that automakers require. He projects earnings per share will grow from $1.88 last year to $2.50 this year, and then to $2.70 in 2000 and $3 in 2001. He also has set a price target for the stock of $35 in a year and $39 in two years.

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