1 Main Capital, a long-biased investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A net return of 21.2% was recorded by the fund for the year end 2020, outperforming both its S&P 500 benchmark that returned 12.5 and the Russell 2000 index that returned 9.4%. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
1 Main Capital, in their Q4 2020 Investor Letter said that Superior Industries International, Inc. (NYSE: SUP) was a meaningful contributor to the fund’s Q4 performance. Superior Industries International, Inc. is a company that designs, modify and produce motor vehicle parts and accessories. It currently has a $122.3 million market cap. For the past 3 months, SUP delivered a huge 142.64% return and settled at $4.62 per share at the closing of January 29th.
Here is what 1 Main Capital has to say about Superior Industries International, Inc. in their investor letter:
“Superior Industries (SUP) is one such example of an opportunistic position and was a meaningful contributor to the Fund’s Q4 performance, having tripled from our cost basis. Hopefully, things play out as I expect them to, and if they do I think it can triple again.
SUP is a leading designer and manufacturer of automotive wheels in North America and Europe. I have been following the company from afar ever since its former CEO leveraged up the company to pursue a transformational acquisition several years ago, after which its stock price proceeded to decline by 95% over the next 3 years due to operational issues which led to leverage concerns followed by COVID.
The company was founded in 1957 and was family controlled and operated until 2014, when the first outside CEO was brought in. After inheriting SUP with a clean balance sheet and leading market position in its primary North American market, this outsider decided to make his mark on the company with some geographic expansion and a transformational acquisition.
In 2017, the company announced the acquisition of UNIWHEELS, a leading supplier of automotive wheels in Europe, for $715 million in cash. At the time, SUP’s market capitalization was $600 million, and it had less than $100 million of net cash on its balance sheet, so the company took on considerable leverage to complete the acquisition.
Soon after completing the acquisition, Superior’s North American division began to significantly underperform internal expectations due to weak volumes and its mispricing of some of its programs. In turn, equity holders were spooked by the high leverage and looming risk of insolvency. By the end of 2018, SUP’s stock had declined by over 80% from its pre-UNIWHELLS levels. A new CEO was hired in 2019, but COVID hit as he was trying to right the ship, causing the stock fell even further.
During COVID, auto production practically came to a halt for a few weeks. In Q2, the company’s sales declined by nearly 60% YoY. Despite this rapid and unexpected hit to revenues, adjusted EBITDA was nearly breakeven due to the company’s flexible cost structure. By Q3, production began picking back up; in this period, revenue was down just 10% YoY, while EBITDA grew 20% driven largely by permanent cost reductions.
Better yet, free cash flow was up even more than EBITDA due to aggressive working capital management. In fact, through the third quarter, SUP generated $60 million of free cash flow, reduced its net debt to $519 million and had record liquidity of $336 million.
The Fund initiated its position in SUP after the impressive third quarter results and updated full-year guidance made it clear that imminent bankruptcy risk was low. At the time, the company’s market cap was a mere $35 million, compared to $50 million+ of annual free cash flow potential in a normalized auto environment. Our purchase price of less than 1x free cash flow made this a very asymmetric bet.
While not the highest quality business, it is also not a horrible one. A vast majority of the company’s sales are to auto OEMs in North America and Europe, where it has the #1 or #2 position. Once spec’d onto a model, SUP’s wheels are rarely switched out until the program has a major update or reaches end of life. This provides decent visibility into revenues. Lastly, scale allows the company to have a lower cost structure than competitors, while also investing in making higher value wheels (larger, lighter, stronger) to drive market share while also pushing per unit revenues and margins higher.
New management also seems to have a better handle on the business than the prior team. In fact, in a show of confidence, the new CEO purchased $200k worth of shares not long after the Fund initiated its position. Lastly, the outlook for auto production is very robust over the next year, as auto dealer inventories were greatly reduced during COVID as production slowed while new car sales soared.
In short, there are times when it makes sense to be flexible and relax some of the core position criteria by investing a small amount of capital into opportunities where we can make 5x or more on our investment over a relatively short duration. SUP is a good example of such an opportunity, and I am confident we will find more over time.”
Last December 2020, we published an article telling that Superior Industries International, Inc. (NYSE: SUP) was in 12 hedge fund portfolios. Its all time high statistics is 17. SUP delivered a 50.79% return in the past 12 months.
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