A Red Light for Accuride

 | Nov 28, 2012 | 12:30 PM EST  | Comments
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According to a filing with the Securities and Exchange Commission, Coliseum Capital has acquired 2.8 million shares of Accuride (ACW), a provider of wheels and other parts to truck manufacturers, dealers and distributors. Coliseum, which is managed by Christopher Shackelton and Adam Gray, had not reported any shares of Accuride in its 13F filing for the end of the third quarter, so it is likely that the fund purchased all of these shares in the last two months. Accuride shares are down 47% since the beginning of October, following an announcement that it would underperform its previous guidance. The stock is now down 65% year to date, and down 82% from its initial-public-offering price in March 2010.

In the third quarter, Accuride reported an 11% decline in revenue compared with the same period in 2011. Since the company had taken a net loss in the third quarter of last year, even moderate cost cutting failed to deliver a profit; however, the net loss showed very little change despite lower sales. Revenue had actually been up in the first half of 2012, and so the company has reported higher revenues year to date, yet slightly higher net losses than in the first nine months of 2011.

If Accuride's business is going to shrink further, even with more aggressive expense reduction plans (for example, management has announced that it will shut down a plant), the company will continue to struggle. Its balance sheet at the end of September showed about $20 million in cash and cash equivalents; therefore, the company is depending on its substantial receivables and inventories to pull its current assets above its $108 million in current liabilities. With cash flow from operations very narrowly positive in the first nine months of the year (since depreciation is responsible for Accuride's entire net losses), we'd guess that figure has gone negative in the last few months. The company is also highly levered. We'd note that Cetus Capital, a large shareholder in Accuride, has also been buying shares this November, so Coliseum isn't alone in its optimism on the company. We also believe it's odd that Coliseum -- which, according to its 13F filings, has historically favored healthcare and services stocks -- is getting involved in a near-distressed business in a very different industry.

Wall Street analysts expect that Accuride will be unprofitable both this year (unsurprisingly, given the hole the company is already in) and next year (again, as might be expected given management's new guidance). Even on an EBITDA basis, the company doesn't look like a good value with an EV/EBITDA multiple of 6.3x (and EBITDA, like earnings, is likely to decay as the business performs more poorly). Accuride also stands out for being extremely exposed to the broader economy with a beta of 5.8.

We don't believe it's a good idea for investors to follow Coliseum's lead here. While the fund is probably confident in its thinking to take such a large percentage stake in a company whose business is outside its historical comfort zone, it's tough for us to call Accuride cheap as is. With the financials expected to remain poor next year, it seems like any investment would be speculative. Transportation, and trucking in particular, could well be good investment opportunities if the U.S. economy holds steady or even picks up, but we expect that we would be able to find more stable and profitable companies selling it reasonable valuations in the market.

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