We downgrade our recommendation on Superior Industries International, Inc. (SUP - Analyst Report) to Neutral from Outperform. Based in Van Nuys, California, Superior Industries is one of the world’s largest designers and manufacturers of cast aluminum road wheels for the automotive industry. The company also produces certain accessory items for the automotive aftermarket.
Superior Industries released its 2011 first quarter results on May 06, 2011. The company reported adjusted net income of $11.2 million or 41 cents per share, up 84% year over year from $6.1 million or $0.22 per share. Net sales, too, improved 26% to $189.5 million driven by growth in sales volume and an increase in average sales price of wheels.
The company has a broad customer base. It serves almost all the giant car manufacturing companies in the world. It usually enters into multi-year business contracts with its client companies. So its business is somewhat protected from year-over-year instability and uncertainty.
In addition, Superior Industries has no bank or other interest bearing debt on its balance sheet. The absence of any long-term debt has allowed for full utilization of cash by investing in potential opportunities.
However, the prospects in the industry are more or less limited for Superior Industries mainly because of the highly competitive nature of the automotive component supply industry. Competition in the industry stems from price, technology, product quality, delivery and overall customer service.
Apart from the existing big players such as U.S.-based Alcoa Inc. ((AA - Analyst Report)), Amcast Industrial and Hayes Lemmerz, the company faces potential threats from newly formed companies, especially from the low-cost foreign markets such as China.
Another growing threat is the rising prices of raw materials, especially aluminum which is one of the primary metals used in the company’s products. According to Alcoa, the world’s leading producer of primary aluminum, fabricated aluminum and alumina, increasing demand of aluminum from the developing countries like China, South Korea, Thailand and India is very likely to keep metal prices at substantially high levels for the near term.
One crucial drawback of the company is its overdependence on a very few number of customers. Superior Industries has significant exposure to the Big Three – Ford Motor Co. ((F - Analyst Report)), General Motors Company ((GM - Analyst Report)) and Chrysler. The Big Three represent almost 80% of its total wheel sales.
Furthermore, all of Superior’s major customers have announced restructuring actions, including planned assembly plant closures and delays in launching light truck programs to accelerate the move toward more fuel-efficient passenger cars and crossover-type vehicles. This is negatively impacting the company’s operations.
Thus, considering all the factors, the shares of Superior Industries are maintaining a Zacks #4 Rank, which translates into a short-term “Sell” rating.