Shiloh is Undervalued: Buy Before Tesla Model 3 Goes Mainstream

Summary

SHLO’s Q2 2016 came out at $284.26 million, a 4.4% improvement compared to the same quarter last year

Revenue growth has continued over the past five years, but net income has failed to play catch-up

SHLO secured new customers in Europe and North America with leading OEMs, including GM, Honda, JLR, Scania, Subaru, and Volvo during Q2

As a supplier of Tesla, SHLO will greatly benefit if Tesla Model 3 goes mainstream, says CEO

Company Overview

Shiloh Industries, Inc. (NASDAQ:SHLO) is primarily involved in producing NVH, which stands for Noise, Vibration, and Harshness, solutions for automotive and commercial vehicles. As a leading global supplier of NVH and lightweighting solutions, Shiloh Industries, Inc. delivers stellar solutions in aluminum, magnesium, steel, and high strength steel alloys to OEM and other downstream partners. Some of the high value customers of Shiloh Industries, Inc. are Tesla, Nissan, Volvo, General Motors, Ford, Jaguar, and Land Rover.

Shiloh Industries, Inc.’s lightweighting solution portfolio of products includes three well-known brands called BlankLight®, CastLight™ and StampLight™ that meets TS16949 and APQP standards.

Currently, Shiloh Industries, Inc. employs around 3,600 people in technical and sales capacity and has offices in key markets, including, Asia, Europe, and North America.

As of June 12, Shiloh Industries, Inc. had a market capitalization of $142 million with sales volume worth over $1.1 billion.

Review of Q2 2016 Financial Results

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Figure 1: Shiloh Industries, Inc. Q2 2016 Revenue Came Out at $284.26 Million

On June 8, 2016, Shiloh Industries, Inc. released its second quarter 2016 financial results, which showed that the company generated around $284.26 million revenue during Q2. Compared to $272.3 million revenue in the same quarter last year, it has increased by 4.4% this year.

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Figure 2: Net Income of Shiloh Industries, Inc. Came Out at $3.06 Million

In Q2 2016, Shiloh Industries, Inc. made a net profit of $3.06 million, a sharp improvement in contrast to the $5.1 million loss generated by the company in Q1 2016. This happened because of an improvement in the gross margin, which came out at 8.9% in Q1. However, in 2015, Shiloh Industries, Inc. had a better gross margin in Q2, 10.3%.

While there is a consensus in the market that Shiloh Industries, Inc.’s revenue growth would be higher in coming years compared to its peers, Capital Cube mentioned that “the company’s annual revenues seem to be coming at the expense of earnings.”

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Figure 3: Shiloh Industries, Inc.’s ROE Has Fallen to -1.79%

We also found that since Q2 2014, Shiloh Industries, Inc.’s return on equity has been falling and currently ((TTM)) it is at -1.79%, a matter of great concern for investors.

In the end, there were two good news from the Q2 earnings report, first, company generated $12.8 million cash from operations during Q2, a 12-fold improvement compared to $1.1 million in Q2 2015, and second, they have reduced the long-term debt by $10.1 million during Q2 and the long-term debt is currently at $266.3 million. The debt situation is particularly important, as the company might have been used too much leverage and raised a bit too much debt in the recent past.

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Figure 4: Shiloh Industries, Inc.’s Stock Price Has Reached $8.2 Per Share After Releasing Q2 Earnings

As a result of improving revenue and net income in Q2, since the earnings report was released, Shiloh Industries, Inc.’s stock price has gone up to $8.2, which represents a 56.49% year-to-date improvement.

Takeaway from the Q2 2016 Earnings Call

During the Q2 2016 earnings call, the CEO of Shiloh Industries, Inc., Ramzi Hermiz, did not forget to gloat about the fact that his company’s revenue growth has “outpaced global automotive production during the second quarter.”

While this is true, if we analyze the quarterly net income of Shiloh Industries, Inc., over the five years, they always earn the highest profit during the second quarter due to the cyclical nature of their business. But, the concern for investors remains in terms of the low net profit margin of the company that has failed to keep up with the revenue growth over the past few years.

Shiloh Industries, Inc. management seems to be giving too much emphasis on the business opportunity that Tesla Model 3 might bring to the company, but for a good reason. Mr. Hermiz explained that “there is great excitement in the industry around the significant demand for pre-orders to Model 3 and has potential to become a mass production electric vehicle.”

If the Tesla Model 3 ends up generating ample demand in the market, Shiloh Industries, Inc. would greatly benefit as the supplier of a number of components for Tesla’s Model T. Besides, they are already providing Tesla with lightweighting components for their Model S and Model X vehicles, said the CEO.

Mr. Hermiz also gave some good news regarding securing new customers in Europe and North America with leading OEMs, including GM, Honda, JLR, Scania, Subaru, and Volvo.

Conclusion

Investors should understand that Shiloh Industries, Inc.’s management is in the process of turning a print and process company into an engineering and product company. They have done some great work in R&D.

One of such examples would be producing axle housing from aluminum instead of iron, which reduces the weight of a vehicle or part by 43% or 24 pounds per vehicle without compromising the strength of the component. We are hoping that innovation like these will continue to improve fuel efficiency for the end product, the car, and drive sales of Shiloh Industries, Inc. in the coming years.

While the growth prospects of the company are not in debate, Shiloh Industries, Inc. management should take measures to improve their bottom line situation soon.

Regardless, Shiloh Industries, Inc. appears to be undervalued and long-term investors should consider adding Shiloh Industries, Inc. to their portfolio.