Beruflich Dokumente
Kultur Dokumente
Post-Restructuring Auto Parts Manufacturer with Stable Barriers to Entry, Secular Trend
Growth, Strong 19.4% ROIC, Hidden Earnings Value, Misunderstood Exposure, and
Asymmetric Return Payoff Structure
Jonathan Chang
j.chang@queensu.ca
Queens School of Business
Stephen Peng
stephen.peng@queensu.ca
Queens School of Business
MICROECONOMIC
MARKET MISPRICING
2|
Complex
Assemblies
Chassis
Structures
Body
Structure
Capitalization
Mkt Cap
$517.3m
Cash
$136.0m
Debt
$459.8
Minority Interest
$57.2
Preferred Equity
$0.0
EV
$898.30
KEY
Key STATISTICS
Statistics
2014 Revenue
2067.8
2014 EBIT
105
15E EV / EBITDA
4.8x
15E P/E
7.7x
BUSINESS EXPLANATION
Key Statistics
Ranking
Company 2067.8
2014 Revenue
2014 1
EBIT
105
Tower International
15E EV /Con-way
EBITDA Inc
4.8x
15E P/EEquity Lifestyle Properties
7.7x
Stepan Company
5 Buffalo Wild Wings
Comfort Systems USA
Kimball International
Magna International
Kaplan Rating
100
100
100
100
99
99
99
99
INDUSTRY OVERVIEW
Tower International (NYSE:TOWR)
SUPPLY
Volume
$90
1.00m
Depreciation, 6%
0.75m
$70
Nov-'14
Jan-'15
Mar-'15
May-'15
Jul-'15
10.4
11.6
Direct Labor,
21%
0.00m
Sep-'15
14.4
Materials, 47%
Administration,
10%
0.25m
$30
Sep-'14
Logistics, 3%
Other, 7%
0.50m
$50
R&D, 6%
15.5
16.4
16.8
17.5
12.7
$1,500
$1,300
$1,100
$900
$700
$500
Sep-'14
Dec-'14
Mar-'15
Jun-'15
Truck/SUV
1360
1810
Steel Weight
Total Weight
Car
Source: Demand - Bureau of Labor Statistics, RBC Economics Research, Bloomberg, IHS Automotive Sales Forecasts, Capital IQ
Supply - How Stuff Works, Automobile Engineering Partners, Market Realist, Capital IQ
1090
1360
Sep-'15
THESIS OVERVIEW
Tower International (NYSE:TOWR)
Lack of Foreign
Competitors
Heavy merchandise
are difficult to
transport. They must
be manufactured
close to an OEM
plant or within a
facility.
Other
5%
18%
31%
Light Trucks
Product
Mix
18%
NA Framed
Vehicles
Large Cars
Small Cars
28%
High switching costs are the third and probably most common
source of customer captivity. Greenwald
Customer
Proximity ->
HIGH SWITCHING
COSTS
Unusual for OEM
to switch suppliers.
High degree of
integration in
supply chain and
strong
efficiencies.
6%
22%
15%
3%
4%
5%
Customer
Mix
6%
7%
8%
14%
9%
Tier 2
Honda
BMW
Chery
Toyota
Daimler
Fiat
Nissan
Volvo
Chrysler
VW
Ford
Cheaper
Labor Cost
Advantage
Auto OEMS competitors have
struggled with unions. TOWR
has ~20% lower labor cost/hr.
Contract Nature of
Business
Natural for industry to have
longevity of relationships.
Provides visibility into future
business streams. Habits are
like the gravitational pull of
familiar coffee brands.
Source: Company filings, Jeremy Raper, Seeking Alpha, Alpha Architect, David Foulke, Bruce Greenwald, Chrysler, 27 Gen
2013
9.3%
93.219
4.7%
133.79
548.51
20.1%
11.1%
Operating Margin
4.6%
2.3%
ROIC (excluding
intangibles)
D&A / Revenue
4.2%
19.4%
2011
8.2%
65.188
3.2%
99.56
632.26
10.8%
Gross Margin
Revenue/Invested
Capital
4.5x
Operating Working
Capital/ Revenue
10.1%
Net PPE / Revenue
2012
9.0%
83.875
4.4%
168.65
627.86
14.0%
2014
8.8%
95.014
4.6%
208.40
510.97
19.4%
EBITDA Margin
Operating Income
Operating Margin
Operating WC
Invested Capital
ROIC
21.8%
Outputs
Source: Company filings, JP Morgan North American Equity Research, 10K Filing. McKinsey Measuring and Managing Value of Companies.
Operating working capital defined as operating current assets - (current liabilities - ST debt - current portion of capital leases). Invested Capital defined as non-cash operating working capital plus net property, plant and equipment.
Return on invested capital defined as NOPAT + operating lease interest divided by non-cash working capital plus net property, plant and equipment excluding goodwill and acquired intangibles.
Key Drivers
Inputs
2010
9.5%
57.516
3.3%
99.58
576.74
10.4%
MISPRICING IDENTIFICATION
Tower International (NYSE:TOWR)
4%
China
7%
37%
Brazil
Europe
52%
North
America
2014 Revenue
58x
47x
38x
28x
27x
23x
22x
19x
17x
Jan
Feb
Mar
15x
Apr
32x
15x
May
55x
46x
41x
32x
31x
20x
15x
Jun
Jul
Aug
Sep
25x
Shiller P/E
TOWR
Jun-'15
Source: Demand - Bureau of Labor Statistics, RBC Economics Research, Bloomberg, IHS Automotive Sales Forecasts, Capital IQ
Supply - How Stuff Works, Automobile Engineering Partners, Market Realist, Capital IQ
Jun-'15
SHCOMP
Jul-'15
Jul-'15
S&P500
Aug-'15
Aug-'15
Sep-'15
Current FCF yield of 3.75% from 4.3% in 2014 and 17.26% in 2013.
Capex increased from $78.0m in 2013 to $98.4m in 2014.
Market is overreacting to short-term results skewed by one-time charges
RESTRUCTURING OVERVIEW
EPS (Adjusted)
EPS
23
5.1x
2011
EBITDA
$145.6
12
ST
VC
THRM
JCI
HAR
BWA
DLPH
2012
2013
2014
$157.1
FCF
Net Income
$162.4
$73.5
8.4 x Average
GNTX
FDML
SRI
MGA
SUP
LNR
LEA
MRE
STRT
TEN
MPG
AXL
DAN
GT
TOWR
CPS
($0.99)
Operating Income
$49.1
$43.0
$19.9
MOD
$1.04
($1.20)
$163.7
15
8 8
7 7 7 7
6 6 6 6 6 6
$1.08$0.90
11 12
10 11
$1.23
($1.67)
($3.43)
2010
$3.02
$2.28
($0.4)
($23.3)
($36.9)
2010
2011
Source: Company filings, JP Morgan North American Equity Research, 10K Filing. McKinsey Measuring and Managing Value of Companies.
$64.3
$75.3
$18.0
($29.0)
2012
$168.0
$80.8
$22.7
$21.5
($20.3)
2013
2014
Debt Schedule
(USD in Millions, except ratio data) 2015A
Cash
$556.3
Debt
$1,869.3
Net Debt
$1,313.0
1 Year EBITDA
$733.2
Leverage Ratio
Adjusted Leverage Ratio
EBITDA
4.5x
Leverage Ratio
$200
3.5x
3.0x
$150
2.5x
2.0x
$100
$0
1.5x
1.0x
2011
2013
0.5x
1.40x
1.31x
0.94x
0.88x
0.0x
2015E
2017A
$628.5
$1,403.4
$774.9
$826.7
4.0x
$50
1.79x
1.65x
2016A
$599.3
$1,683.4
$1,084.1
$775.1
2017E
Source: Company 10K, 2015 2Q Earnings Presentation, Sterne Agee CRT, Jermalism, 2015 EC Investor Presentation, Jeremy Raper, Seeking Alpha
RECOMMENDATION
Tower International (NYSE:TOWR)
9,953.3
517.3
10,714.0
899.9
13.9
10.0
TEV/Revenue
LTM
CY+1
CY+2
0.60x
0.62x
0.57x
1.41x
1.54x
1.38x
1.33x
1.35x
1.14x
0.51x
0.50x
0.47x
0.44x
0.44x
0.42x
Blended Average
6.1x
5.1x
6.0x
4.7x
5.3x
4.2x
11.5x
14.8x
10.5x
10.2x
9.3x
8.4x
(24.4%)
(26.2%)
(25.4%)
(15.8%)
(21.4%)
(21.3%)
32.5%
(26.2%)
(16.2%)
15x
7x
5x
6x
5x
6x
5.1x
8x
4x
1.4x
0.5x
LTM
FY1
FY2
LTM
EV / EBITDA
FY1
P/E
FY2
CY+2
8.8x
11.8x
12.3x
9.3x
7.0x
0.57x
0.42x
7.9x
10x
P/E
CY+1
10.4x
14.2x
14.7x
10.5x
8.2x
0.62x
0.46x
PRECEDENT
TRANSACTIONS
11x
10x
LTM
11.1x
16.8x
15.8x
11.5x
10.2x
TOWR
12x
CY+2
5.2x
8.1x
6.8x
5.3x
4.9x
0.60x
0.45x
ILLUSTRATIVE DISCOUNT
PUBLIC COMPS
TEV/EBITDA
LTM
CY+1
5.9x
6.0x
9.2x
9.3x
7.7x
7.9x
5.8x
5.7x
6.1x
5.4x
EV / Rev
LTM
EV /
EBITDA
LTM
WACC
8.28%
8.78%
9.28%
9.78%
10.28%
WACC
8.28%
8.78%
9.28%
9.78%
10.28%
4.60x
35.66
34.78
33.91
33.06
32.24
5.60x
43.52
42.48
41.46
40.47
39.50
-0.50%
45.42
42.77
40.38
38.20
36.22
0.50%
51.84
48.51
45.53
42.86
40.45
To conclude
Overall recommendation and valuation summary
Tower International is a rare opportunity to buy into a great value-creating business model at bargain prices.
FOOTBALL FIELD VALUATION CHART
Discounted Cash
Flow Analysis
$30
Public Company
Comparables
and Precedent
Transactions
$39
Sep. 27
Share Price:
$22.77
$47
$35
$41
$48
$37
$41
$34
$10
$15
$20
$25
$30
$40
$35
$40
EV / EBITDA
2017E Adj. EBITDA
Implied Price
Bear
4.6 x
$220.46
$29.70
Base
5.1 x
$220.46
$35.39
Bull
6.5 x
$220.46
$49.78
$0.00
$29.70
$6.18
$41.57
$6.18
$55.96
$22.77
30.4%
11.2%
$22.77
82.6%
27.2%
$22.77
145.8%
43.3%
$63
$45
$36
Target Share
Price:
$35.39
$50
$45
$50
$55
$60
$65
$70
$75
$80
RETURN OPPORTUNITY
Multiple cases
based off of three
scenarios:
1. Adjusted
multiple
2. Non-adjusted
multiple
3. Blended
industry peer
group average
$40.26
$35.39
$6.18
$41.57
$22.77
82.6%
27.2%
APPENDIX
Tower International (NYSE:TOWR)
Post-restructuring auto parts manufacturer with stable barriers to entry, secular trend growth, strong 19.4% ROIC,
hidden earnings/NOL value, misunderstood exposure, and asymmetric return payoff structure
MACROECONOMIC
MICROECONOMIC
MARKET MISPRICING
17 |
RISKS
EV / EBITDA
2017E Adj. EBITDA
Implied Price
Bear
4.6 x
$220.46
$29.70
Base
5.1 x
$220.46
$35.39
Bull
6.5 x
$220.46
$49.78
$0.00
$29.70
$6.18
$41.57
$6.18
$55.96
$22.77
30.4%
11.2%
$22.77
82.6%
27.2%
$22.77
145.8%
43.3%
Source: Company 10k Filings, Capital IQ, Seeking Alpha, Equity Research
Total Revenue
Annual Growth
Cost of Revenue
EBITDA
Less: Depreciation and Amortization
EBIT
Less: Income Taxes
Unlevered Net Income
Plus: Depreciation and Amortization
Less: Capital Expenditure
Less: Increase in Working Capital
Unlevered Free Cash Flow
Annual Growth
17.3%
2012
1,925.8
(6.2%)
1,710.4
173.8
89.9
83.9
(14.5)
69.4
89.9
(92.3)
4.5
71.5
112.3%
Less:
Total Debt
Preferred Stock
Minority Interest
Plus:
Cash and Equivalents
Equity Value
Shares Outstanding
Implied Per Share Value
Current Price
Premium/(Discount) to Current Price
Source: Company 10k Filings, Capital IQ
2014
2,067.8
5.2%
1,838.6
182.3
87.2
95.0
(16.4)
78.6
87.2
(98.4)
(9.1)
58.3
(49.6%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015E
1,973.1
(4.6%)
1,757.6
181.1
83.8
101.9
(17.6)
84.2
83.8
(92.2)
6.6
82.4
41.4%
2016E
2,099.9
6.4%
1,870.6
193.6
91.5
109.2
(18.9)
90.3
91.5
(98.2)
7.0
90.6
9.9%
2017E
2,211.6
5.3%
1,970.1
206.1
98.7
117.2
(20.3)
96.9
98.7
(103.4)
7.4
99.6
9.9%
MULTIPLES METHOD
PV of 2015 Free Cash Flow Stub
PV of 2016-2019 Free Cash Flows
PV of Terminal Value
Enterprise Value
2013
1,966.5
2.1%
1,737.7
182.1
88.8
93.2
(16.1)
77.1
88.8
(78.0)
27.7
115.6
61.7%
25.0
339.9
813.1
1,178.0
136.0
795.5
Less:
Total Debt
Preferred Stock
Minority Interest
Plus:
Cash and Equivalents
Equity Value
21.1
37.69
22.77
65.5%
Shares Outstanding
Implied Per Share Value
Current Price
Premium/(Discount) to Current Price
(461.4)
0.0
(57.2)
2018E
2,329.5
5.3%
2,075.1
219.5
106.4
125.8
(21.8)
104.0
106.4
(108.9)
7.8
109.3
9.8%
2019E
2,454.0
5.3%
2,186.0
233.6
114.7
135.0
(23.4)
111.6
114.7
(114.7)
8.2
119.8
9.6%
CAGR
2015-2019
5.6%
6.6%
8.2%
7.3%
7.3%
5.6%
5.6%
9.8%
WACC CALCULATION
25.0
339.9
921.4
1,286.3
(461.4)
0.0
(57.2)
136.0
903.7
21.1
42.82
24.51
74.7%
5.75%
1.439
8.3%
2.2%
2.5%
13.0%
52.9%
6.9%
6.3%
17.3%
5.2%
47.1%
2.5%
WACC
9.3%
Target Name
Date
Transaction
Equity
Transaction
Enterprise
Operating Metrics
Valuation Multiples
EV /
EV /
Value
Value
Revenue
EBITDA
Revenue
EBITDA
Pall Corporation
Danaher Corp.
08/31/2015
13,565.26
13,644.98
2,851.39
670.16
4.8x
20.4x
ContiTech AG
01/30/2015
1,910.09
1,910.09
2,046.52
267.56
0.9x
7.1x
10/14/2014
1,004.7
455.43
51.4
2.2x
19.6x
NN Inc.
08/29/2014
271.32
325.37
248.53
42.57
1.3x
7.6x
Visteon Corporation
07/01/2014
265.0
265.0
1,300.0
58.0
0.2x
4.6x
Jason Incorporated
06/30/2014
538.65
538.65
680.8
79.8
0.8x
6.8x
04/01/2014
46.0
70.62
40.27
8.58
1.8x
8.2x
03/31/2014
39.47
78.01
35.08
4.37
2.2x
17.9x
02/20/2014
434.99
928.7
2,163.6
184.45
0.4x
5.0x
FCA US LLC
01/21/2014
8,803.67
7,760.67
72,144.0
5,924.0
0.1x
1.3x
12/20/2013
112.5
169.47
84.33
19.65
2.0x
8.6x
Gentex Corp.
09/27/2013
700.0
700.0
143.19
76.79
4.9x
9.1x
Danfoss A/S
04/11/2013
2,833.04
3,024.69
1,916.09
399.38
1.6x
7.6x
03/27/2013
142.94
153.73
295.46
12.99
0.5x
12.2x
Median
435
619
568
67
1.4x
7.9x
TOWR
$517.3
$899.9
$1,986.9
$175.7
0.5x
5.1x
(69%)
(36%)
Source: Capital IQ
$2,002.0
$103.1
$21.6
$81.5
$2,176.0
$112.5
$18.5
$94.0
$2,283.6
$120.4
$14.5
$105.9
$2,442.7
$105.8
$13.0
$92.8
$2,564.8
$108.4
$11.6
$96.8
NOLs
Beginning NOL Balance
NOL Carryforward Usage
Ending US NOL Balance
$438.7
($81.5)
$357.2
$357.2
($94.0)
$263.2
$263.2
($105.9)
$157.3
$157.3
($92.8)
$64.4
$64.4
($64.4)
$0.0
Tax Savings
Annualized Tax Savings
$28.53
$10.97
$32.90
$12.66
$37.07
$14.26
$32.50
$12.50
$22.55
$8.67
2015E
35%
9.3%
$130.35
2016E
2017E
2018E
2019E
TOWR possesses deferred tax assets in the form of NOLs worth $130 million. This hidden asset translates to a 14% upside to
enterprise value and adds $6.18 per share.
Source: Bloomberg, 10k Company Filing
Q2 2015A
Q3 2015E
Q4 2015E
Q1 2016E
Q2 2016E
Q3 2016E
Q4 2016E
Q1 2017E
Q2 2017E
Q3 2017E
Q4 2017E
Revenue
Organic
Ford: $70 million Contract
Herrajes y Acabados: Acquisition
Adjusted Revenue
$497
$497
$490
$490
$495
$485
$491
$480
$540
$541
$10
$536
$10
$530
$515
$487
$18
$11
$565
$522
$493
$18
$11
$573
$528
$500
$18
$11
$580
$535
$506
$18
$12
$588
$542
$513
$18
$12
$596
$549
$520
$18
$12
$603
$556
$527
$18
$12
$611
$564
$534
$18
$13
$619
EBITDA Margin
EBITDA
Adjusted EBITDA Margin
Adjusted EBITDA
9.0%
$44.7
9.7%
$48.2
10.3%
$50.5
10.9%
$53.4
8.7%
$43.14
9.4%
$46.36
8.7%
$42.76
9.4%
$45.95
9.1%
$46.8
9.7%
$50.13
10.3%
$53.5
10.9%
$56.91
8.8%
$46.3
9.4%
$49.71
8.8%
$47.0
9.4%
$50.52
9.2%
$49.8
9.8%
$53.34
10.3%
$56.6
11.0%
$60.18
8.9%
$49.4
9.5%
$53.03
8.9%
$50.2
9.6%
$53.90
$19.90
$24.83
$7.85
$2.10
$14.00
$17.60
$19.70
$30.77
$4.00
$2.40
$18.60
$22.50
$19.91
$23.22
$4.95
$6.56
$11.71
$14.93
$19.73
$23.03
$4.95
$6.50
$11.58
$14.77
$20.70
$26.08
$4.90
$4.84
$16.34
$19.69
$20.97
$32.55
$4.80
$6.04
$21.71
$25.10
$21.24
$25.03
$4.65
$4.64
$15.74
$19.17
$21.52
$25.52
$4.46
$4.73
$16.33
$19.81
$21.80
$28.02
$4.26
$5.59
$18.17
$21.69
$22.08
$34.53
$4.11
$5.66
$24.75
$28.32
$22.37
$27.05
$3.97
$5.74
$17.34
$20.96
$22.66
$27.57
$3.77
$5.81
$17.99
$21.65
GROWTH DRIVERS
The three latest business contracts (worth $340 million in annual
revenue) all have EBITDA margins of ~15%. Towers acquisition of
Mexican stamp supplier is also accretive with growth potential of
10% as opposed to the Mexican industry standard of 8%. North
American auto sales have been increasing by ~5.5% per annum,
while the European markets have recently reversed their trend of
falling automobile demand. As such, we projected a 5% organic
growth in revenues from 2016 onward. This is in line with
management expectations.
Source: Company 10K Filing, Sterne Agee, Capita IQ, Company 2Q Presentation
ASSUMPTIONS
5.4% organic growth in 2016 and 2017
No further acquisitions and business contracts
Because of 15% EBITDA NA business wins and acquisition of
Mexican stamper, NA growth projected at ~10-12%
Consistent 4% depreciation and amortization
EBITDA margins are comparable to previous years in terms of
seasonality (i.e. Q1 and Q2 margins are higher due to increased
business vs. fixed costs)
Debt paydown through FCF alone
Taxes remain consistent around 17-22% due to DTAs
+8.6%
+5.4%
-14.7%
+1.6%
-20.3%
In North America, GM and Fiat Chryslers respective restructuring are expected to benefit the industry. Demand for part development will likely
increase, costs will decrease, and overall, the major automakers will become more stable customers. The global recession forced automakers to
cut costs, including labor and increase the quality of product offerings, causing them to become more profitable moving forward. Sales in
Europe and Brazil denominated in USDs are expected to pick up in the next few years once the US dollar momentum subsides.
IBIS World, Sterne Agee, Tower International 10K, Wall Street Journal.
ACCESS TO CAPITAL
12.00%
$1,000.00
8.00%
$750.00
4.00%
$500.00
0.00%
$250.00
$0.00
2005E
-4.00%
-8.00%
2007E
Revenue
2009E
2011E
2013E
2015E
2017E
Unemployment Rate
Stress test figures were pulled from the U.S. Comprehensive Capital Analysis and Review data
published in 2015. A regression analysis was performed to assess the correlation between
Towers revenue and the U.S. GDP growth and unemployment rate. This correlation ceofficient,
0.84, was applied to the stress case.
U.S. 2015 CCAR, U.S. Federal Reserve, Capital IQ, Tower International 10K
6%
22%
3%
4%
5%
6%
VW,
15%
7%
8%
14%
9%
Tier 2
Honda
BMW
Chery
Toyota
Daimler
Fiat
Nissan
Volvo
Chrysler
VW
Ford
Volume
VW Price
250
2.0m
1.5m
200
1.0m
150
0.5m
100
Sep-'14
0.0m
Mar-'15
Sep-'15
Volume
VW Price
180
2.0m
170.5
160
166.7
164.4
169.6
161.15
167.4
1.5m
140
1.0m
133.7
120
0.5m
100
0.0m
Aug-28
Sep-1
Sep-5
Sep-9
Sep-13
Sep-17
Sep-21
26 |
Source: Yahoo Finance, Lex Financial Times, Business Insider
Q1 2015A
Q2 2015A
Q3 2015E
Q4 2015E
Q1 2016E
Q2 2016E
Q3 2016E
Q4 2016E
Q1 2017E
Q2 2017E
Q3 2017E
Q4 2017E
$135.4
$487.4
$352.0
$189.0
$136.0
$462.4
$326.4
$182.1
$121.3
$462.4
$341.1
$177.7
$145.9
$457.1
$311.2
$181.1
$131.7
$447.1
$315.4
$183.1
$118.1
$432.1
$314.0
$186.2
$123.7
$412.1
$288.4
$189.3
$135.2
$392.1
$256.9
$193.6
$113.9
$377.1
$263.2
$196.7
$104.4
$362.1
$257.7
$199.7
$122.8
$342.1
$219.3
$202.9
$147.1
$322.1
$175.0
$206.1
1.86
1.75
$135.4
$487.4
$352.0
$189.0
1.79
1.64
$136.0
$462.4
$326.4
$182.1
1.92
1.73
$121.3
$462.4
$341.1
$177.7
1.72
1.60
$145.9
$457.1
$311.2
$181.1
1.72
1.61
$131.7
$447.1
$315.4
$183.1
1.69
1.58
$118.1
$432.1
$314.0
$186.2
1.52
1.42
$123.7
$412.1
$288.4
$189.3
1.33
1.24
$135.2
$392.1
$256.9
$193.6
1.34
1.25
$113.9
$377.1
$263.2
$196.7
1.29
1.21
$104.4
$362.1
$257.7
$199.7
1.08
1.01
$122.8
$342.1
$219.3
$202.9
0.85
0.79
$147.1
$322.1
$175.0
$206.1