Today’s recommendation is a deep-discount turnaround candidate from The Turnaround Letter Editor George Putnam III. Putnam has the distinction of choosing the best-performing stock in last year’s Investment Digest Top Picks contest. In addition, his 2013 Top Pick, MGIC Investment Corp. (MTG), was the best-performer at mid-year this year, so he may come out on top again. Here’s a recent recommendation from his letter.
Accuride (ACW)
from The Turnaround Letter
Accuride produces wheels and related components for commercial vehicles. It has a relatively short but tortuous corporate history. Founded in 1986 to acquire a division from Firestone, the company was acquired by Phelps Dodge in 1988 and then resold in a leveraged buyout to Kohlberg Kravis & Roberts in 1997. It went public in 2005, but with a leveraged balance sheet it could not survive the 2008-2009 recession, and it filed for Chapter 11 in October 2009.
The company emerged from Chapter 11 in February 2010, but it was not out of the woods yet. Manufacturing problems surfaced at several operating units, particularly the Gunite brake division, which reduced volumes, hurt quality and raised costs. Then, as the company began fixing the production issues, orders for new trucks softened, causing results to decline further.
Analysis
Over the last couple of years, Accuride has invested heavily in its operations with the result that it has not only fixed the earlier problems but also become leaner and more efficient. Among other things, it has upgraded equipment and shut down less efficient plants. As quality issues fade into the past and delivery times get more dependable, the company has been able to win more business. And with costs coming down, profit margins are improving.
In addition to streamlining its operations, Accuride is also selling non-core assets to re-focus on wheels and related components and use the proceeds to improve the balance sheet. In August it completed the sale of its Imperial Group body and chassis component business for $30 million in cash.
While demand for truck components has been choppy in recent quarters, longer-term trends look favorable. The gradually improving economy is increasing the demand for trucking services at the same time as aging truck fleets will require higher replacement evels.
Accuride has several large and savvy stock-holders who have been patient with the company to date. But if results do not continue to improve they may begin to agitate for the sale of the company.
Now that Accuride has fixed its operating problems and is re-focusing on its core business, we believe it is well positioned to profit from any upturn in demand for trucks and other commercial vehicles. We recommend buying Accuride stock up to 8.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550,
October 2013