Accuride ("ACW") is a high quality business that emerged from bankruptcy in February 2010, operates in a rational duopoly / oligopoly industry construct, and supplies the North American Commercial Vehicle ("CV") industry.  The stock has been crushed in the recent sell-off (down ~45% in the past 30-days vs. Russell 2000 Index down ~19%) principally due to investor liquidations, amplified by the lumpy / traditional credit-oriented funds that owned ACW post-emergence.  At current prices ($7 / share), ACW is being priced as if the CV industry is on the cusp of another 2008 - 2009 downturn in which Class 8 builds got to 35-year lows (i.e. ACW TEV is roughly equivalent to the implied "creation value" through the bonds during the BK proceeding - at prior cycle lows while in BK, there was an equity rights offering risk, uncertainty around the fulcrum security and lack of financing for CV industry at large) but the reality is that the CV industry is replacement-driven and has gone through a long period of under-investment (2008 - 2009 was the worst CV cycle in the past 35 years and the current age of the fleet implies 4 - 5 years of tailwinds).  On a fundamental basis, ACW equity is compelling for several reasons, most notably:

1. Mis-perceived as economically sensitive ... but cyclical tailwinds are "replacement-driven": I believe the opportunity exists because the company is mis-perceived by the market as an economically sensitive play on the commercial vehicle ("CV") industry.  The reality is that the company's CV end-market is replacement-driven and has gone through a long period of under-investment (2008 - 2009 was the worst CV cycle in the past 30-years) and the current age of the North American fleet implies 4 to 5 years of tailwinds (age of Class 8 fleet is >6.7 years versus the prior record high of ~6.4 years in 1985).  Recent comments from industry participants below: 
   1. Rush Enterprises CEO - Q2 Call / July 27th: "I've said numerous times that '11, '12 and '13 remind me a lot of '04, '05 and '06. Now, is it going to hit that same high peak number and '13 that it hit in '06? Don't know. But the way things are playing out, it well could get closer than maybe I thought 90 days ago."
   2. Werner CEO - DB conference / June 15th: "During the recession in '08 and '09 we made the decision to increase our average truck age as rates were not adequately compensating us for the capital investments to maintain into our fleet. We increased our average age to about 2.8 years by the end of 2010. Our maintenance cost increased more than we anticipated and we're working hard to begin lowering that cost. We're increasing our capex spend by approximately $60 million in 2011 with entirely replacement trucks ... So the one thing to think about, if you look at the truck builds the last four years in our industry, still well below replacement level; and over that period of time, trucks have worn out and gone to truck - the truck bone pile and if we're replacing at a lower level than normal replacement"
   3. Knight CEO - Wolf Trahan Conference / May 25th: "The thing that hits me in the forehead the most is, every time we look at a company that is for sale, I'm amazed at the amount of investment that hasn't been made in that fleet over the last three or four years."
2. Under-appreciated earnings power ... leading to cheap valuation: at current trading levels of ~$7/share, ACW trades at ~4.2x normalized EBIT / FCF proxy and is an asymmetric risk / reward long proposition, with total return potential of >100 - 200% over the next 6 - 18 months (PT of $17 - $18 / share based on base case further below).  Looked at differently, today one is paying ~7.0x - 7.5x "normalized" EBIT for the company's Wheels business (~42% of revenues) + getting a free option on the turnaround of the Non-Wheels segment (~58% of revenues) that has $55MM - $85MM of embedded earnings power that's not being priced into the current equity share price.
3. New, yet proven change-agent / CEO ... to lead the turnaround of Non-Wheels segment:  ACW's turnaround is being led by Rick Dauch (brought in to run ACW in early 2011), who has a proven-track record at American Axle and Acument Technologies and is highly regarded in the industry.   Dauch has a clear strategy to realize $55MM - $85MM of additional earnings power from ACW's under-performing Non-Wheels segment.  I have received multiple positive checks on Dauch and am encouraged that he has already brought in 10+ former employees to strengthen his management bench.  Current stakeholders are effectively getting the "turn-around" of Non-Wheels segment for free (capitalizing $70MM - mid-point - at a 7.5x multiple equates to ~$525MM of value on a ~$331MM market cap equity. 

ACW is a ~$1Bln revenue CV supplier largely focused on manufacturing wheels (aluminum and steel) and wheel components (mostly brake drums and disc wheel hubs).  (1) Wheels segment: ~42% of ACW's revenue and offers attractive margins, high ROIC and strong incremental margins (remained FCF positive even during 2009 trough in CV industry, one of the few to do so, which was impressive) and competes in a highly rational industry construct given duopoly structure on aluminum side and oligopoly construct on steel side.  Having done extensive diligence checks , key findings include: limited foreign competition /  risk of new entrants (unlike light vehicle space), replacement value is significant creating high barriers to entry, and ACW has ~2x the capacity on aluminum wheels that it had in prior up-cycle (notable, given ACW lost incremental $ and business in 2007 as it did not have enough capacity to serve its customer base) which is a positive for ACW given the attractive margin profile / industry construct and limited risk of industry over-capacity. (2) Non-Wheels segment: ~58% of ACW's revenue and offers strong brands and a sound industry structure, BUT historically lacked capital investment and pricing discipline during industry downturns.  This segment contains four businesses (Gunite, Imperial, Brillion and Fabco) and is currently operating in the neutral / low single digit EBIT margin range but has the potential to be high single / low double digit EBIT margin business in the next 12 - 18 months which equates to >$75MM of profit potential.   ACW management has a clear action plan in place to improve margins on the "non-wheels" business by >1000 bps in the next 12 - 18 months.  Specifically, the Gunite division, which manufactures brake drums, discs, hubs, rotors, represents the largest upside opportunity.  Gunite has a ~40% market share and the industry construct is largely rational with the top three players controlling ~85% of industry capacity.  ACW's main competitors include ConMet (owned by Amsted) and Webb Wheel (owned by Berkshire Hathaway).  Given tight industry-wide capacity, price increases of ~20% were implemented for after-market / distribution customers (additional price increases on the OE side of the business are in progress in the mid-teens % range and management is confident they will see the full benefit heading into 2012E). During the q2 2011 conference call, management highlighted their confidence in making Gunite a high teens EBITDA margin business (which compares to its current mid / high single digit EBITDA margin level).  Every 250 bps of margin improvement equates to ~$9MM so management's goal of attaining >1250 bps of margin improvement equates to >$45MM profit potential. 

Valuation

ACW has ~47MM shares outstanding.  At ~$7 / share, this equates to a ~331MM market capitalization.  Excluding pension / NOLs but factoring in net debt of ~287MM (this factors in a ~$22MM acquisition recently completed), equates to an enterprise value of ~$618MM.  Based on 2012E EBIT of ~$130 - $140MM (unleveraged FCF proxy), this equates to ~4.2x EBIT multiple. 

Longer-term, I value the Company on a cycle-average / "normalized" basis, as I do with other cyclical businesses.    I have assumed a "normalized" EBIT of ~$130 - $140MM of EBIT based on ~240 - 250k Class 8 assumption.  This implies wheels EBIT of ~$75MM - $80MM and non-wheels EBIT contribution of ~$55MM - $60MM.  Given ACW's strong positioning in wheels and the Gunite segment, attractive free cash flow characteristics (in a normalized environment), rational industry structure and potential strategic interest (especially in the non-wheel segments), I believe that ACW is worth >7.5x "normalized" EBIT (unleveraged FCF proxy).   This is ~1.5 - 2.5x discount to ACW's historical 10-yr trading multiples.  Assuming a 7.5x EBIT / FCF proxy multiple, this implies an equity valuation of >$16.25 / share.  Every 1.0x expansion in the EBIT multiple equates to ~$3 / share of equity value. 

Bear Case: apply ~7x multiple to 2012E EBIT implies ~$945MM TEV less 2012E ending net debt of ~$240MM  = ~$705MM mkt cap which equates to ~$14.75 - $15.00 / share FV.  Based on current price of ~$7 / share, implies >100% upside over the next 6 - 18 months

Base Case: apply ~8x multiple to 2012E EBIT implies ~$1.08Bln TEV less 2012E ending net debt of $240MM = ~$840MM mkt cap which equates to ~$17.75 / share FV.  Based on current price of ~$7 / share, this implies ~150% of upside over the next 6-18 months.  NOTE that there is upwards of >$20 - $25MM of EBIT potential in the non-wheels biz which I have NOT given ACW credit for.  Tax effecting this $22.5MM and capitalizing at 10x implies an additional >$135MM of value or >$2.85 / share of upside above / beyond the figures presented.

Bull Case: apply ~9x multiple to 2012E EBIT implies ~$1.215Bln TEV less 2012E ending net debt of $240MM = ~$975MM mkt cap which equates to ~$20.50 - $21.00 / share FV.  Based on current price of ~$7 / share, this implies ~200% upside over the next 6 - 18 months.  NOTE that there is upwards of >$20 - $25MM of EBIT potential in the non-wheels biz which I have NOT given ACW credit for.  Tax effecting this $22.5MM and capitalizing at 10x implies an additional >$135MM of value or >$2.85 / share of upside above / beyond the figures presented.

Catalysts

• Covenant-Light capital structure / More-than-adequate liquidity: This is a cycle play (2 - 3 years) with a high quality business that's being valued as if the business goes away in the n-term.  In the n-term, I'd anticipate management providing an update on expanding their ABL (providing additional comfort on liquidity)

• Insider buying / potential strategic options (current / TBD): While relatively small in size, recent insider + Board buying in the $7 - $8 / share range has been encouraging.  In addition, it's worth noting that ACW's Chairman (Bill Lasky) and current CFO (Jim Woodward) previously worked together at JLG Industries and ultimately were successful in maximizing value for shareholders (by selling to Oshkosh  for >1.3x sales)  

• 2H 2011 performance (3 - 5 months): There is a tremendous amount of pent-up-negativity in the CV industry given economic uncertainties.  Any less-than-expected-disasters could result in marginal buyers

• Additional clarity on non-wheels business turnaround (next 3 - 6 months)

• Improved shareholder base (3 - 9 months)

• New CEO providing clarity on exiting "non-core" business units (3 - 12 months)

• Greater appreciation for underlying earnings power (3 - 12 months)

• Truck build cycle / macro risk alleviating (timing TBD) 

Risks

• Cyclical end-market / Macro risk around Class 5 - 8 CV cycle

• Execution risk around turn-around of non-wheels biz

• Customer concentration (~55% of sales from top 4 truck OEM customers)