|Shares Out. (in M):||48||P/E||0||0|
|Market Cap (in M):||157||P/FCF||8.5||0|
|Net Debt (in M):||383||EBIT||42||0|
This was originally intended to be a simple credit idea but ended up morphing into a bond and equity idea as ACW stock melted down with the market in August. I view both instruments as special situations – the bond as a potential yield-to-call play and the stock as part of a levered equity basket trade.
Buy ACW equity. ACW is a rather boring small-cap levered industrial equity that could very well continue to be a value trap but is worthy of consideration for a small part of a portfolio given its undemanding valuation and potential for near to mid-term shareholder value enhancing catalysts. With a market cap of $157mm and total net debt of $383mm (includes pre-tax unfunded pension in the amount of $93.4mm), the equity is trading at 6.2x FY15 EBITDA. Free cash flow in FY15 should approximate $18.5mm representing a yield to equity of nearly 12%. If you strip out the cash of $31mm, then the FCF yield would be closer to 15%. On this basis, I don’t believe the stock is expensive but perhaps also not screaming cheap given the Company’s checkered past (2009 bankruptcy), the uncertainty of where we are in the heavy-duty trucking cycle, its above average leverage, and the historical volatility of its P&L.
However, what the market may be not be pricing in is the high likelihood of material deleveraging of the Company’s balance sheet, along with much improved margins in its core businesses, and a more attractive growth profile over the next several of years. It’s a matter of time that the Company refinances its expensive bond at a significantly lower interest rate which would save the Company $5 – 7mm per annum (an additional 4% to equity). Additionally, it’s also a matter of time that the Company divests its low margin Brillion Iron Works business (~19% of total revenues) to focus on its higher margin core wheels and wheel end assemblies businesses; proceeds from this sale would be used to pay down debt and to fund international growth. Assuming these two events materialize within the 12 – 18 months, the stock could appreciate to $4.50 – 5.50/sh by the end of 2016, representing potential medium-term upside of 40 – 65%. Further upside could come from a significant accretive acquisition and/or additional large contract wins. Regardless of where we are in the trucking cycle, I expect ACW to be a larger wheels oriented business within 2 – 3 years and after factoring in the operating leverage and prudent use of financial leverage on acquisitions, there is potential for significant shareholder value creation here.
Buy ACW 9.5% secured bonds. If you can find them at or below par, this short duration first lien secured paper, which essentially sits close to the top of the capital structure, makes for a solid coupon clipper and a decent place to hide in today’s turbulent markets. At 3.3x EBITDA, the bond has above average asset coverage and while the there is some risk that management may be unable to call it at 102.375 given the volatility in the high yield markets, I believe that the odds of a refinance are high once we get through this current market turbulence. Best case is a solid risk adjusted 12 – 13% IRR and worst case is that you’re the fulcrum instrument in a business that is delevering via strong cash flow generation and has decent near-term growth prospects.
ACW is a manufacturer and supplier of commercial vehicle components in North America, primarily for heavy and medium-duty truck OEMs. ACW products can be found in heavy and medium-duty trucks, commercial trailers, light trucks, buses, as well as specialty and military vehicles. Its products include commercial vehicle wheels, wheel-end components and assemblies, and ductile and gray iron castings. These products are marketed under the Accuride (wheels), Gunite (wheel-end components), and Brillion (iron castings) brands and are manufactured at eight plants across the U.S., Mexico and Canada. The Company was forced to file bankruptcy in 2009 after the trucking market collapsed during the financial crisis. It exited Chapter 11 in 2010 but with a debt load that was still too high.
Sales to OEMs represent 70% of the Company’s total revenues with the balance coming from aftermarket channels. As of today, all of the Company’s revenues are generated in North America – approximately 80% of sales are generated in the U.S. with the balance in Canada and Mexico. The Company’s heavy-duty truck customers include Navistar (International brand), Daimler Truck North America (Freightliner and Western Star brands), PACCAR (Peterbilt and Kenworth brand), and Volvo Group North America (Volvo and Mack brands). Commercial trailer customers include Great Dane, Utility Trailer Manufacturing, and Wabash National. The Company’s light truck customer is General Motors.
Competitors in the wheel markets include Alcoa (aluminum wheels) and Maxion Wheels (steel wheels). Primary competitors in the wheel-ends and assemblies markets for heavy- and medium-duty trucks and commercial trailers are KIC Holdings, Meritor, Consolidated Metco, and Webb Wheel Products. For the balance of its industrial component products, the Company competes with various foundries in the U.S.
Thoughts on Truck Builds
We are at a point in the cycle where views on the economy and cyclical industries can vary substantially. My personal view on truck builds is neutral – I don’t see a lot of growth over the next few years but also don’t see a major contraction. It’s fair to see assume that NA Class 8 builds will peak this year and will approach cycle adjusted average levels in the coming years. However, the NA medium duty builds are still growing and might surprise to the upside behind the continued strength in the U.S. housing and automotive markets, both of which generate substantial amounts of freight. A few other high level observations that suggest that fundamentals may remain stable in the near-term:
* trucker cash flow is at record levels
* trucker capex is still subdued relative to prior peaks
* fleet age remains elevated which could bode well for expanding orders
* key industry metrics including tonnage/volumes, contract rates/pricing, and utilization are all trending up
I will note that the recent economic data points are concerning and do point to slower economic growth than what most were anticipating only a few months ago. Time will tell what these indicators will show in the coming months but I think its still too early to throw in the towel on the U.S. economic recovery thesis.
A few charts below from the Company with industry forecasts for builds: