Description

ACW

Leading North American manufacturer of commercial vehicle wheels and wheel-end units with over 40% market share trading at 30%+ free cash flow yield with several near term catalysts to drive share price appreciation.

Company Overview

We recommend Accuride Corporation (the “Company”, “Accuride”, or “ACW”) as a long.

Accuride Corporation is a manufacturer of wheels (aluminum and steel) and wheel-end units with substantial market share within North America. Since coming out of bankruptcy with a new CEO in 2010, ACW has significantly turned around its business through 1) doubling its aluminum wheel manufacturing capacity, 2) more than quadrupling the EBITDA margins of its wheel-end unit business, and 3) creating concrete plans to expand internationally – positioning the company for sustainable cash flow generation and top line growth.

Over the last 5 years, ACW has spent a significant amount of capex to overhaul its manufacturing facilities, which has now been completed. Going forward, maintenance capex spend should be substantially lower, leading to stronger cash flow generation. As of Q4’15, ACW has almost fully overhauled its ERP system (2 facilities remaining) and expects to see further savings through better inventory management, purchasing efficiencies, and improved lead-times.

We expect to see a re-ignition of top line growth across the industry cycle and further margins expansion as 1) the percentage of revenue from aluminum wheels overtakes revenue from steel wheels, 2) aftermarket wheel sales continue to grow as ACW continues to gain market share, 3) customers lost due to ACW going through bankruptcy in 2010 begin to return and 4) international expansion opportunities gain traction.

ACW also owns a non-core, standalone iron casting foundry asset (“Brillion”), which the Company has unofficially put up for sale. Management believes the foundry is worth $30-50m. A sale, which would eliminate ~$5m of associated cash burn and generate proceeds that could be used to decrease leverage, would serve as a solid catalyst for stock price appreciation.

Wheels Segment (62% of total revenue)

ACW manufactures steel and aluminum wheels through six manufacturing facilities spread across the U.S., Canada, and Mexico.

Aluminum

Aluminum wheels are 50% of Wheels Segment revenue, up from 33% back in 2010, when ACW emerged out of bankruptcy.

OEM revenue – OEM revenue is 50% of aluminum revenue. ACW is gaining share with ~40% market share of OE trucks and OE trailers, up from 30% a year ago.

Aftermarket revenue – Aftermarket revenue makes up the remaining 50% of aluminum revenue. ACW currently holds 70% market share, up from 65% a year ago.

Competition – The only real competitor within the aluminum wheel segment is Alcoa. Over the last few years, Alcoa has been hitting manufacturing and capacity issues leading to missed customer deadlines and longer lead-times. ACW has been able to take advantage of the situation through better in-stock availability, inventory management, and shorter lead-times. As industry capacity has been very constrained (ACW’s aluminum wheels utilization rate is 95%), pricing has been trending upwards. Chinese and other Asian competitors are not in the Aluminum Wheel space as they have not been able to manufacture aluminum wheels of comparable quality to ACW/Alcoa nor to the specs required by customers. Purchasing goods that require shipping from Asia to North America has also become a challenge for OEMs, as they continue to decrease their lead-times.

Industry – Aluminum wheels currently account for 40% of total North America industry demand (remaining 60% is steel). Penetration of aluminum wheels has steadily increased over the last few years due to increased regulations regarding vehicle fuel efficiency. Aluminum wheels weigh close to ½ the weight of steel wheels, thus offering substantial fuel efficiency improvements. As penetration continues to increase, ACW will be able to benefit due to its stable OEM relationships and growing aftermarket market share (currently at 70%).

Steel

Currently 50% of the Wheels Segment revenue is from steel wheels. This split has decreased from 67% back in 2010, when ACW emerged out of bankruptcy.

OEM revenue – OEM revenue as a percentage of steel revenue is 70%. ACW is losing share with ~50% OEM market share, down from 60% a couple years ago. Maxion (acquired by Hayes) has 25% market share. Chinese and Asian competitors have 25% market share (up from 15% a few years ago).

Aftermarket revenue – Aftermarket revenue is 30% of steel revenue. ACW currently holds 30% market share, down from 50% a few years ago.

Competition – Competition within the steel wheels segment is fierce with Chinese and Asian competitors vying aggressively for market share. They have made substantial progress in penetrating truck trailer OEMs and the aftermarket space, but have struggled with truck OEMs. ACW believes it is the lower-cost producer within the steel wheels market, but that the Asian competitors are currently “dumping” their products at below cost given their excess capacity. In general, Asian steel wheels are being priced at $7-8/wheel cheaper than ACW’s $65/wheel. ACW has proactively managed this business to maintain margins even while revenue has declined.

Gunite Segment (25% of total revenue)

ACW manufactures brake drums, disc wheel hubs, brake rotors and slack adjusters in one manufacturing facility within the U.S.

OEM revenue – OEM revenue as a percentage of Gunite revenue is 20%. ACW’s market share has been flat. The Company has only one OEM customer (Volvo/Mac) and the corresponding contract was recently renewed. Management has been aggressively pursuing customers it had lost when ACW went through its bankruptcy process in 2010.

Aftermarket revenue – Aftermarket revenue as a percentage of Gunite revenue is 80%. ACW is growing market share and has just signed a LTA with Daimler Alliance, adding $5-10m of aftermarket revenue for 2016.

Competition – KIC, who won the Navistar business from ACW back in 2010, is a direct competitor to Gunite. There are no Chinese or Asian competitors within this space. Due to significantly improved quality, we believe that as RFQs come up for bid, Gunite should growth both its OEM and aftermarket business.

Brillion Segment (14% of total revenue)

Brillion is a non-core, iron casting foundry focused on industry and automotive components. Due to the downturn in oil/gas, metals/mining, and agriculture, Brillion revenue has decreased significantly in 2015. These three end-markets accounted for 60% of 2014 revenue and a substantially lower percentage for 2015. Management has been proactive on cost control and has minimized the impact of Brillion on the bottom line while continuing to upgrade its manufacturing capability. In conversations with management, they have indicated that they have received permission to explore an expedited sale of this non-core asset. Management believes Brillion should have a market value of $45-50m.

The current management team has historically been proactive in shedding non-core assets to unlock shareholder value:

• 2010 – Sold Brillion Farm (non-core)

• 2011 – Sold Fabco (non-core)

• 2011 – Sold Bostrom (non-core)

• 2013 – Sold Imperial Group Manufacturing (non-core)

We believe that the management team is highly focused on shedding this non-core asset and that the announcement would be a strong catalyst for stock price appreciation.

Investment Thesis

1. Wheel segment revenue growth

1. Since exiting bankruptcy, ACW has leveraged its superior technical expertise, improved its manufacturing capability, and focused on growing its aluminum capacity. Over 2015, aluminum wheels accounted for an equal percentage of revenue vs. steel wheels. ACW is also gaining both OEM and aftermarket market share within the aluminum wheel business due to its short lead-times, inventory availability, and quality products. We believe the Company has approached an inflection point in top-line growth as aluminum wheels continue to grow.

2. Gunite turnaround completed

1. Since emerging from bankruptcy in 2010, ACW’s mgmt team has been able to improve Gunite’s EBITDA margins substantially from 2.6% to 15.2%. Gunite’s turnaround performance was recognized by the Association for Manufacturing Excellence in 2015. ACW has completed the heavy lifting and has started to see customers who left Gunite in 2010/2011 come back with RFQs.

3. International expansion fueling growth

1. Currently, ACW’s international revenue outside of North America is only 2% of total. ACW recently acquired 70% stake in Italian wheel manufacturer (“Gianetti Ruote”) by investing EUR$19.75m to grow the business. Management has indicated that Gianetti Ruote generates more than $40m of revenue on a run-rate business and that it currently has 9% market share. This acquisition provides ACW a platform to grow its international market share closer to ACW’s U.S. average of 40%.

4. Stable aftermarket revenue

1. With 48% of 2015A revenue (excluding Brillion) through aftermarket sales, ACW will continue to exhibit more consistent revenue and cash flows throughout the industry cycle

2. Continued growth in truck tonnage and truck ton-miles drives demand for replacement ACW wheel and wheel end products.

5. Sale of Brillion

1. The sale of Brillion will generate $45-50m of proceeds, which ACW can use to deleverage its business and realize further interest expense savings.

6. Strong free cash flow generation

1. ACW’s exceptional management team has successfully improved cash flow generation year over year and will continue to do so based on all the factors above.

2. Further opportunity over the next 18 months to improve cash flows through refinancing existing 9.5% senior notes at more favorable rates; every 1% interest rate improvement yields $3m in annual interest expense savings

Near Term Catalysts

• Continued growth in aluminum wheel revenue

• Improved margins of overall Wheels segment

• Improved margins of Gunite segment

Medium Term Catalysts

• Announced sale of non-core Brillion segment

• Announced refinancing to improve cash flow profile

Valuation and Price Target

We believe that ACW is significantly undervalued at its current share price. A semi-cyclical business with strong revenue growth and cash flow generation profile should be valued at approximately a 15% free cash flow yield (vs. a current yield of 30%+). A 15% free cash flow yield on PF 2015A Adj. EBITDA (assuming sale of Brillion) implies a price per share of $4.88 – 184% premium over current share price of $1.72.

Catalyst

Near Term Catalysts

• Continued growth in aluminum wheel revenue

• Improved margins of overall Wheels segment

• Improved margins of Gunite segment

Medium Term Catalysts

• Announced sale of non-core Brillion segment

• Announced refinancing to improve cash flow profile