SUP - Superior Industries International: Promising Company That Could Provide Significant Returns

2023-03-08 09:53:30 ET

Summary

• SUP recently posted solid FY22 and Q4 FY22 results.
• The management tackled challenges like high inflation, supply chain disruptions, and OEM production volatility in FY22.
• The stock has broken out of an important resistance zone.
• I assign a buy rating on SUP.

Superior Industries International (SUP) designs and manufactures aluminum wheels for OEM and aftermarket distributors in Europe and North America. In addition, they supply aluminum wheels to automobile manufacturers. The company offers its products under the RIAL, ANZIO, and ATS brand names. They recently announced their FY22 and Q4 FY22 results . In this report, I will analyze its financial performance and discuss its future growth prospects. Even after several macroeconomic headwinds, they managed to post solid annual results, which is quite impressive. In addition, they look technically strong. Hence I give SUP a buy rating.

Financial Analysis

SUP recently announced its FY22 and Q4 FY22 results. The net sales for FY22 were $1.6 billion, a rise of 18.5% compared to FY21. I believe the rise in net sales was due to higher aluminum prices. The customers paid more for aluminum in FY22. As a result, they saw increased sales in North America and Europe. The net sales in the North American region in FY22 were $943.7 million, a rise of 26.6% compared to FY21, and in Europe, the net sales were $696.2 million, a rise of 8.8% compared to FY21. The net income for FY22 was $166.4 million, a significant rise of 873.6%. I believe the main reason behind the rise was higher value-added sales.

The net sales for Q4 FY22 were $402.1 million, a rise of 9.1% compared to Q4 FY21. I think that increased consumer demand for its high-end wheels and cost inflation passed on to consumers were the major causes of the increase. Net sales in North America and Europe grew in Q4 FY22 compared to Q4 FY21 by 10.8% and 7.3%, respectively. The net income for Q4 FY22 was $16.5 million compared to a net loss of $3.9 million in Q4 FY21. Higher value-added sales, which were fueled by a good wheel mix and client recoveries, are, in my opinion, the primary cause of the increase. Even after several macroeconomic headwinds like high inflation, lower volumes, and OEM production volatility, they managed to post solid results, which shows how efficient and promising the company is.

Technical Analysis

SUP is trading at the level of $7.2. Since November 2021, it has been trading below $6. It made two unsuccessful attempts to break through that price but recently broke out with an enormous green candle. The stock dropped more than 45% whenever it reached the $6 level of resistance, indicating that the recent breakout was significant and that it may soar from current levels. The company is showing a lot of strength, and I anticipate it will rise to $9 in the near future. In my view, one should wait for the retest, and once the retest is done, one can make fresh entries into the stock.

Should One Invest In SUP?

The revenue estimate for FY23 is $1.7 billion, which is 3.7% higher than FY22 revenue. I know the growth of 3.7% is not much, but for me, it is very impressive; the reason I am saying this is that the automobile industry is facing various headwinds like inflation, supply chain disruption, volatility in production, and many more since last year and I think they will continue to face it in 2023. When almost every company in the industry is struggling and posting disappointing financial results. SPU managed to post solid annual results, and expecting positive revenue growth in FY23 is quite impressive. I think with increasing demand for its premium products. It will achieve its revenue targets.

Now talking about the valuation part. I will use two valuation metrics to judge its valuation. The first ratio is the P/E ratio; it is a method of valuing a business by comparing the cost of a stock to its earnings. They have a P/E ((FWD)) ratio of 8.48x compared to the sector ratio of 14.66x. It shows that they are undervalued. The second ratio is the EV / EBITDA, which compares a company's overall valuation to EBITDA. They have an EV / EBITDA ((FWD)) ratio of 4.29x compared to the sector ratio of 9.98x. After looking at both ratios, I believe they are undervalued, have great growth potential, and can provide significant returns to their shareholders.

Risk

The price of aluminum plays a sizable role in the total cost of the wheels, and in the prices at that, they are sold to customers. The timing of price adjustments is based on specific customer agreements and can range from monthly to quarterly. It bases changes in some public market indices on changes in those that affect its OEM customer prices for variations in aluminum. Because of this, the timeliness of price changes for raw materials like aluminum and a few others rarely coincides with changes in the cost of goods sold, which can cause fluctuations in the company's gross profit and might affect their balance sheet.

Bottom Line

Even after several challenges, they were able to post solid annual and quarterly results. They tackled high inflation, supply chain disruptions, and OEM production volatility very well; this shows how efficient the management is. They have provided optimistic revenue guidance for FY23 when almost every company in the industry is struggling to maintain the growth rate. In addition, the stock is looking very bullish and might provide significant returns in the future. Their valuation also looks good, so after analyzing all the factors, I assign a buy rating on SUP.

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