NYSE:TOWR

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

Image Source: Sigma Recruitment

Why is this company worth your attention?

Towers International is a quality business priced at asymmetric payoffs

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

Growing industry secular trends of outsourced

MARKET MISPRICING

auto parts work from OEMs.

Stable industry position with high barriers to

entry and customer captivity.

Post restructuring / special situation with

opportunity for value creation (bankruptcy

overhang).

Minimal Chinese market exposure where

Misunderstood exposure to Asia. Recent sell-off

Falling oil prices and booming American

Longer-term investments skewing short-term

volatility is unattractive feature.

economy to help car sales.

Decrease in steel price means cheaper cost

input for auto part manufacturers.
VALUATION

Trading at non-adjusted discount in ~25% range.

Worst cast scenario provides 30% upside
threshold while best case provides 146%.

Suggested base upside is ~83% (27% CAGR).

Source: Various.

provides cheap entry point.

results in EPS. Hidden earnings value.

UNIQUE BUSINESS MODEL

Competent management focused on capital

allocation and transparency.

ROIC generation in high teens.

Diversified customer mix suggesting higher
supplier power for TOWR.

Deleveraging of operations to create value from

debt pay down and risk-averse investors.

Hidden NOL balance sheet asset.

2|

Founded in 1993 in Michigan as Tower Automotive, this Capitalization

Mkt Cap
$517.3m
easy-to-understand business IPOd in 2010
Cash
$136.0m
Debt
$459.8
Post-restructuring auto parts manufacturer with stable barriers to entry, secular trend growth, strong 19.4% ROIC,
Minority Interest
$57.2
hidden earnings/NOL value, misunderstood exposure, and asymmetric return payoff structure
Preferred Equity
$0.0
PRODUCT OFFERINGS
EV
$898.30
FINANCIAL OVERVIEW
CAPITALIZATION

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

FORBES MOST TRUSTWORTHY COMPANY

BUSINESS EXPLANATION

Tower International is a leading global manufacturer of

engineered automotive structural metal components
and assemblies primarily serving original equipment
manufacturers (OEMs)

Manufactured at 27 facilities strategically located

near customers.
Supported by 7 engineering and sales
locations.
Manufactures vehicle body structures and chassis
systems.

Source: Company filings, ThomsonOne Reuters, Capital IQ, Wikipedia, Forbes

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

In general, companies that make this list can be relied upon to

accurately report financial outcomes. The majority of the
companies here are financially sound, demonstrating strong
stock performance, and providing shareholders with greater 3 |
levels of transparency.

INDUSTRY OVERVIEW
Tower International (NYSE:TOWR)

Auto parts industry to be driven by both supply and demand:

Secular growth in auto sales and positive tailwind in cost drivers
Auto sales are being helped by an expanding U.S. economy, rising consumer
spending, a steadily improving housing sector and low oil prices.
DEMAND

SUPPLY

CRUDE OIL PRICE DECLINE

COST DRIVERS IN AUTO INDUSTRY

Volume

$90

1.00m

Crude Oil Price

Depreciation, 6%

0.75m

$70

Nov-'14

Jan-'15

Mar-'15

May-'15

Jul-'15

FALLING STEEL PRICES MEANS REDUCED PRICE OF INPUTS

US Light Motor Vehicle Unit Sales

10.4

11.6

Direct Labor,
21%

0.00m
Sep-'15

AUTO SALES GROWTH

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

2009 2010 2011 2012 2013 2014 2015E 2016E

Dec-'14

Mar-'15

Jun-'15

STEEL USED IN AVERAGE VEHICLE

MILLENNIALS EMBRACE CARS, DEFYING PREDICTIONS OF SALES IMPLOSION

Millennials accounted for 27% of new car sales in 2014 up

from 18% in 2010 (larger than Gen X).
Positive wage growth and employment rates.
Long-term, low-interest loans making cars more affordable.

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)

Structural competitive advantage presence allows TOWR to

generate franchise value
Share of outsourced supply chain production for major American OEMS have risen to ~40% range up from ~20% in 1990s.
Transportation costs and government barriers to trade may be
high, and distribution may be fragmented and hard to penetrate
HBR

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%

Another possible cost advantage is access to cheap resources

such as labor and capital. Greenwald

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.

There are only a limited number of ways in which customer

behaviour leads to captivity. Habit, usually associated with high
purchase frequency, is probably the most powerful. Greenwald

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

Gradually increasing ROIC levels validate past qualitative

structural competitive advantages and management expertise
Towers ROIC of almost 20% illustrates competitiveness in an industry limited by poor margins; its
return on invested capital has also increased by an annualized rate of 17 percent since 2010
MANAGEMENT

ROIC HAS BEEN IMPROVING ON INCREASING MARGINS

MARK MALCOLM, CEO/PRESIDENT SINCE 07 (AGE 61)

Joined Tower from Cerberus
Worked 28 years with Ford in a variety of
senior financial positions
Highly incentivized to orchestrate a move to
a sustained $40.6 share price before
retirement in FY16

JAMES GOUIN, CFO AND EXECUTIVE VP (AGE 55)

New Business Awards and Accretive Acquisition in 2014/2015

2013
9.3%
93.219
4.7%
133.79
548.51
20.1%

11.1%
Operating Margin

SG&A excl. D&A

/Revenue

4.6%

2.3%

ROIC (excluding
intangibles)

D&A / Revenue

4.2%

19.4%

3contracts worth a total of $340 million on $130 million CapEx

spending (yielding an acquisition multiple of 2.6x) granted to the
company; projected ongoing annual adj. EBITDA of $50 million
Accretive acquisition of stamping supplier in Mexican market for 4x
EV/EBITDA; EPS accretion of ~10 cents/share
Sale at large premium to TOWR and is a strategic move to jettison
non-core, lower value proposition businesses in difficult regions.
The move lowers Towers debt to just north of 1.5x EBITDA.

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

Planned sale of 2/3 JV in China for 6.3x EV/EBITDA in 2H15

2012
9.0%
83.875
4.4%
168.65
627.86
14.0%

ROIC DRIVERS TREE FY2014

Twenty years of experience

Concurrently serves as treasurer of Vista
Maria, a charity organization
Recognized for his work to make Tower the
Most trustworthy company in North
America by Forbes

TRACK RECORD OF SHAREHOLDER VALUE CREATION

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)

Misunderstood exposure to China, a market we view

negatively, has triggered mispricing
Early 2015: TOWR announced sale of 2/3 China JV at a premium multiple of 6.3 EV / EBITDA.
Expect 43m in after-tax proceeds for deal close in 2H 2015 to be used for debt paydown.
To decrease below 4% for 2015

4%

YTD (2015) PEAK VOLATILTY

China

7%

OVERLY COMPETITIVE CHINESE MARKET

37%

Average industry profit in China is expected

to be 7.4% of revenue in 2015. These profits
are projected to decline as competition
between assembly plants and parts
manufacturers intensifies.
Wages have increased at an annualized
rate of 14.5%.
The industry still uses relatively backward
technologies. Economies of scale have yet
to be captured.

Brazil

Europe

52%

North
America

2014 Revenue

China Volatility Index

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

Volatility within Asian markets are unattractive feature for investment.

MARKET INCORRECTLY CORRELATING TOWRS PERFORMANCE WITH ASIA

MARKET MISPRICING
Approximately 8% of the S&P500s revenue in 2013 stem from the
Asia Pacific region according to Goldmans Amanda Sneider. This
figure has grown since due to the increased technological capabilities
in China converging with North American requirements.

TOWR only has a 4% exposure to Asia in terms of revenues, yet

its share price fell 20% since the Chinese market correction
Absolute revenue number for China, was actually a little bit better
through the first half. We dont see that continuing its not going to be
a dramatic and material effect on us overall. TOWR Management

PRICE PERFORMANCE VS. ASIAN/AMERICAN MARKETS

10%
0%
-10%
-20%
-30%
-40%
-50%
Jun-'15

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

With bankruptcy overhang still prevalent in the form of

restructurings, strong earnings power has been hidden
Company is forgoing short-term free cash flow for longer-term value.
With future stabilization, value creation should come from two ways:
1. EPS/EBITDA growth
2. multiple expansion.

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

ONE-TIME CHARGES SKEWING EPS RESULTS

2007: TOWR emerged from bankruptcy after being taken over by

Cerberus Capital Management.
2012: Sale of Korean subsidiary for $47m. Cash used for debt
repayment.
2013: Closed Defense & Aerospace, a non-core business. Action
incurred $15m in restructuring costs during 2013 2Q.
2013: Cerberus finally exits Tower. Its past failures have likely led to the
companys depressed multiple.
Feb 2015: Announced selling of 2/3 China JVs at premium to TOWRs
own EBITDA multiple. $43m in after-tax proceeds expected to be used
on debt repayment.

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

MARKET VIEW: 5YR RELATIVE EBIT, EBITDA, FCF, AND NI

TOWR 15E EV / EBITDA AT LOW END OF AUTO SUPPLIERS

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

Lingering reminiscence of past bankruptcy has lead to

overblown fear of a leveraged balance sheet
Towers management has made it a priority to pay down debt. The companys leverage ratio of 4.2x in
2009 is projected to fall to 0.53x by the end of 2017, drastically reducing the probability of default.
REMNANTS OF TORONTO CLOSED PLANT

TREMENDOUS DEBT PAY DOWN OPPORTUNITY

A drug den for addicts and junkies and a

shelter for hobos and squatters - Blogger

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

NET LEVERAGE VS. EBITDA MARGIN

$250

EBITDA

4.5x

Leverage Ratio

$200

3.5x
3.0x

$150

2.5x
2.0x

$100

$0

1.5x
1.0x

Net leverage decrease from

4.2x in 09 to 1.7x in 15
2009

2011

2013

0.5x

1.40x
1.31x

0.94x
0.88x

The $43 million sale of joint ventures in China is being used to

pay down debt. Through the repayment of debt, value will be
created from the equity portion of EV increasing.
Due to the companys excellent relationship with its loan
syndicate, Tower has immediate future disbursements available
in the form of:
North American Revolving Loan: $190.2 million
European Revolving Credit Facility: $30.4 million

0.0x
2015E

2017A
$628.5
$1,403.4
$774.9
$826.7

STRONG LOAN SYNDICATE EASY ACCESS TO CAPITAL

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)

TOWRs multiples are unjustified at such depressed levels while

intrinsic value validates significant free cash flow generation
It is unclear why TOWR deserves such significant discount. Magna and Martinrea are larger, but trade at
~2x turn premium on adjusted basis. They yield far less on FCF basis and many other profitability metrics.
PUBLIC COMPANY COMPARABLES (NON-ADJUSTED)
Market Enterprise LT Growth
Cap
Value
Rate (%)
20,001.2
19,894.6
13.4
21,516.7
23,612.7
15.4
9,953.3
10,714.0
13.7
8,071.9
9,165.7
14.0
730.3
1,235.1
NA

Auto Parts Company

Magna International Inc.
Delphi Automotive PLC
BorgWarner Inc.
Lear Corporation
Martinrea International Inc
Median
Tower International, Inc.

9,953.3
517.3

10,714.0
899.9

13.9
10.0

Premium (Discount) to Median

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

Source: Capital IQ, Company Filings

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

DISCOUNTED CASH FLOW OUTPUT (IMPLIED SHARE PRICE)

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

EBITDA Exit Multiple

4.85x
5.10x
5.35x
37.63
39.59
41.56
36.70
38.63
40.56
35.80
37.69
39.58
34.92
36.77
38.62
34.05
35.87
37.68

5.60x
43.52
42.48
41.46
40.47
39.50

-0.50%
45.42
42.77
40.38
38.20
36.22

Perpetuity Growth Rate

-0.25%
0.00%
0.25%
46.88
48.44
50.09
44.08
45.47
46.95
41.56
42.82
44.14
39.28
40.41
41.61
37.20
38.23
39.31

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

Future Share Price Analysis

Discounted Cash
Flow Analysis

$30

DCF Gordon Growth Method

Public Company
Comparables
and Precedent
Transactions

$39

Sep. 27
Share Price:
$22.77

DCF Multiples Method

Precedent: EV / EBITDA 15E

$47

$35

$41

$48

Public: EV / EBITDA 15E

$37

Public: Price / Earnings 15E

$41

$34
$10

$15

$20

$25

$30

$40
$35

$40

FUTURE SHARE PRICE ANALYSIS

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

+NOL P/S Value

Total Implied Price

$0.00
$29.70

$6.18
$41.57

$6.18
$55.96

Current Share Price

2.5YR Implied Upside
Annualized Return

$22.77
30.4%
11.2%

$22.77
82.6%
27.2%

$22.77
145.8%
43.3%

Source: Bloomberg, Business Insider, Goldman Sachs, TOWR 10k Filing

Please see Appendix for further valuation models and NOL P/S calculation.

$63

$45

$36

Analyst Price Target

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

DCF Target Price

Base Case Target Price
(No Multiple Expansion)
NOL P/S Value
Base + NOL Implied Price
Sep. 27 Share Price

$40.26
$35.39
$6.18
$41.57
$22.77

2.5YR Implied Upside

Annualized Return

82.6%
27.2%

APPENDIX
Tower International (NYSE:TOWR)

Thank you for listening to our presentation!

Summarizing what we discussed

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

Growing industry secular trends of outsourced

MARKET MISPRICING

auto parts work from OEMs.

Stable industry position with high barriers to

entry and customer captivity.

Post restructuring / special situation with

opportunity for value creation (bankruptcy

overhang).

Minimal Chinese market exposure where

Misunderstood exposure to Asia. Recent sell-off

Falling oil prices and booming American

Longer-term investments skewing short-term

volatility is unattractive feature.

economy to help car sales.

Decrease in steel price means cheaper cost

input for auto part manufacturers.
VALUATION

Trading at non-adjusted discount in ~25% range.

Worst cast scenario provides 30% upside
threshold while best case provides 146%.

Suggested base upside is ~83% (27% CAGR).

Source: Various.

provides cheap entry point.

results in EPS. Hidden earnings value.

UNIQUE BUSINESS MODEL

Competent management focused on capital

allocation and transparency.

ROIC generation in high teens.

Diversified customer mix suggesting higher
supplier power for TOWR.

Deleveraging of operations to create value from

debt pay down and risk-averse investors.

Hidden NOL balance sheet asset.

17 |

How will value be recognized and what is the downside?

Catalysts and Risks
CATALYSTS

RISKS

Sale of China JVs: If the sale of the companys two

Chinese joint ventures go through in 2H 2015, the
company is expected to net $43 million on an accretive
6.3x EV/EBITDA deal.

Price disruption from major automakers: U.S.

dealer inventory levels have reached the highest
levels since 2004. Vehicle prices will be lowered as a
means to increase demand.

Disapproval of TransPacific Partnership: Congress is

headed towards an agreement to abolish Obamas TPP
agreement. This translates to greater autonomy for
domestic manufacturing and labour.

Threat of competition from OEMs: OEMs have the

capacity to create internal assembly lines as opposed
to outsourcing.

Growing regional market: Sales to foreign OEMs have

doubled since 2009 and are expected to increase further
on increased sourcing

Deterioration in the U.S. and world economies:

disruptions in the credit markets could cause
difficulties for OEMs to secure capital for financing.

Share buyback: Management has clearly stated that

they believe that Towers stock price is undervalued. This
may signal the possibility of a buyback program to
artificially prop up share prices.

Continued depressed activity in Brazil and Europe:

Towers recovery is contingent on the recovery of
international markets.

Potential acquisition target: The recent spate of M&A

deals highlights the trend of consolidating smaller
companies. Tower would make a highly accretive
acquisition to any of its larger competitors.

Stricter regulations can increase input prices:

Tower will not be affected by fuel economy standards
for engines and exhaust systems since it does not
manufacture those parts.

Tower is positioned to benefit from a growing North American

auto market. It also tempts the possibility of increasing its stock
price through share buybacks or an outright acquisition.

Source: Bloomberg, Business Insider, Sterne Agee, TOWR 10k Filing

Towers management has been attempting to minimize risks by

downsizing its noncore operations and lowering its exposure to
foreign markets. Focus is on expansion within the U.S. and
Mexico.

Future Share Price Analysis

Primary valuation methodology
Projected upside of 83% on 2.5 year basis or CAGR of 27%.
FUTURE SHARE PRICE ANALYSIS

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

+NOL P/S Value

Total Implied Price

$0.00
$29.70

$6.18
$41.57

$6.18
$55.96

Current Share Price

2.5YR Implied Upside
Annualized Return

$22.77
30.4%
11.2%

$22.77
82.6%
27.2%

$22.77
145.8%
43.3%

Worst case scenario built upon

depreciation in multiple. Base case
assumes decline in multiple from
5.1x to 4.6x. 4.6x and 6.8x are the
current adjusted multiples.

Base case scenario assumes no

change in multiple. Value comes
from increase in EBITDA,
adjustment to reduction in onetime charges, and debt pay down.

Source: Company 10k Filings, Capital IQ, Seeking Alpha, Equity Research

Multiple cases based off of

three scenarios:
1. Adjusted multiple
2. Non-adjusted multiple
3. Blended industry peer
group average

Bull case scenario based on higher

end multiple. In EV / EBITDA, this
was industry multiple while in P /E,
this was non-adjusted current
multiple.

Discounted Cash Flow Analysis

A summary of both methodologies
PROJECTED CASH FLOWS

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%

GORDON GROWTH METHOD

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

PV of 2015 Free Cash Flow Stub

PV of 2016-2019 Free Cash Flows
PV of Terminal Value
Enterprise Value

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%

Market Risk Premium (Rm - Rf)

Multiplied by: NYSE:TOWR Bottom-Up Beta
Adjusted Market Risk Premium

5.75%
1.439
8.3%

Add: Risk-Free Rate of Return (Rf)

Add: Size Premium
Cost of Equity
Multiplied by: NYSE:TOWR E/(D+P+E)
Cost of Equity Portion

2.2%
2.5%
13.0%
52.9%
6.9%

NYSE:TOWR Cost of Debt (Rd)

NYSE:TOWR Tax Rate
After-Tax Cost of Debt
Multiplied by: NYSE:TOWR D/(D+P+E)
Cost of Debt Portion

6.3%
17.3%
5.2%
47.1%
2.5%

WACC

9.3%

Precedent Transaction Analysis

Acquisitions of Auto Parts Manufacturers with close between 2013 2015
SUMMARY OF RELATED TRANSACTIONS
TOWR International - Comparable M&A Transactions
Closed
Acquirer Name

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

Veyance Technologies, Inc.

ContiTech AG

01/30/2015

1,910.09

1,910.09

2,046.52

267.56

0.9x

7.1x

Schrader International, Inc.

Sensata Technologies B.V.

10/14/2014

1,004.7

455.43

51.4

2.2x

19.6x

Autocam Corporation, Inc.

NN Inc.

08/29/2014

271.32

325.37

248.53

42.57

1.3x

7.6x

Johnson Controls Inc., Automotive Electronics Business

Visteon Corporation

07/01/2014

265.0

265.0

1,300.0

58.0

0.2x

4.6x

Jason Incorporated

Jason Industries, Inc.

06/30/2014

538.65

538.65

680.8

79.8

0.8x

6.8x

Professional Pow er Products, Inc.

Pow er Solutions International, Inc.

04/01/2014

46.0

70.62

40.27

8.58

1.8x

8.2x

Sport Truck USA, Inc.

Fox Factory Holding Corp

03/31/2014

39.47

78.01

35.08

4.37

2.2x

17.9x

Titan International Inc. (NYSE:TWI)

MHR Fund Management LLC

02/20/2014

434.99

928.7

2,163.6

184.45

0.4x

5.0x

FCA US LLC

Fiat North America LLC

01/21/2014

8,803.67

7,760.67

72,144.0

5,924.0

0.1x

1.3x

Westport Axle Corp.

Universal Truckload Services Inc.

12/20/2013

112.5

169.47

84.33

19.65

2.0x

8.6x

Johnson Controls Inc., HomeLink Product Line

Gentex Corp.

09/27/2013

700.0

700.0

143.19

76.79

4.9x

9.1x

Danfoss Pow er Solutions Inc.

Danfoss A/S

04/11/2013

2,833.04

3,024.69

1,916.09

399.38

1.6x

7.6x

Wescast Industries Inc.

Sichuan Bohong Industry Co. Ltd.

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

Premium (Discount) to Median

(69%)

(36%)

Source: Capital IQ

Net Operating Loss Analysis

Value on existing 2014 end balance sheet
NOLS AND TAXATION EXPLANATION

DISCOUNTED NOL VALUE

Tower International - NOL Value
(USD in millions, unless otherwise
stated)
Consolidated I/S
Revenue
EBIT
Interest Payments
US EBT (Pre-Tax Income)

$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

Statutory Tax Rate

Discount Rate
NPV of NOLs

2015E

35%
9.3%
$130.35

2016E

2017E

2018E

2019E

At the end of 2014, Towers domestic and foreign

NOLs totaled $438.7 million, expiring between 2020
- 2033.
During 2013, the Company had an ownership
change that limits the annual utilization of the
federal and some state NOLs. The annual federal
limitation is based on the value of the Company at
the time of the change times the long-term tax
exempt rate.
The total amount of tax savings is divided across the
12 years until the NOLs expire. By doing this, Tower
is ensuring that it limits its exposure to high
corporate tax brackets. As such, the annualized tax
savings are limited to roughly 40% of the statutory
tax rate. Future taxes are estimated to be anywhere
from 17 - 22%.

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

Consolidated Income Statement

Assumptions
Tower International - Consolidated Income Statement
(USD in Millions, except ratio data)
Q1 2015A

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

Depreciation & Amortization

Operating Income
Interest Expense
Taxes
Earnings
Adjusted Earnings

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

Towers revenue is projected to rise amidst a secular trend of

increasing global auto sales
2014 GROWTH/DECLINE IN GLOBAL AUTO SALES

+8.6%
+5.4%
-14.7%

+1.6%
-20.3%

2014 GROWTH/DECLINE IN GLOBAL AUTO SALES

National unemployment is expected to decline. As unemployment falls, consumers are more likely to purchase big-ticket items, such as cars,
and demand for auto parts will increase as a result. The financing costs of such vehicles is also cheap due to precipitously low interest rates.

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.

Stress test in the event of a severe recession

Assumptions
In the event of a severe recession, Tower is able to sustain cash flows by tapping its line of credit. Revenues are aided by the
continued need for pedestrian vehicles. Corporate vehicle sales are expected to decline in the event of a recession.

FY2018E STRESS TESTING

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

GDP 1 Yr Growth Rate

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

In the worst months of the recession,

Towers quarterly revenue would plummet
to ~$350 million. The graph to the left
suggests a figure closer to $250 million, but we
applied a multiple of 1.4x since the company
has secured a large number of business
contracts which it did not have in 2007.
In terms of expenses, the majority of Towers
costs are variable. Fixed costs include
operating leases and capital leases totaling
$24 million in 2015 and $20 million in 2016.
The company would also experience
impairment charges on its Mexican stamping
acquisition equal to roughly $10 million.
Finally, Tower would be required to satisfy
interest payments in the amount of $14 - $20
million.
The company would remain solvent because of
its $220.6 million in available funds. Assuming
the worst, the company would need to burn
through its entire LOC and borrow an
additional $100 million to retire poor
performing segments.

Volkswagen emissions rigging affect on Tower as VW takes

15% of revenue
VW Effect on TOWR
The US Environmental Protection Agency (EPA) found
software in VW and Audis 2-litre diesels that make cars
cleaner in emission tests than on the roads. The fine could
be as much as $18bn (if the full fine of $37,500 is levied for
each of the 0.5m diesel cars VW sold in the US since 2009).
Further costs include recalls, customer compensation and
potential lawsuits. VW was the standard bearer for clean
diesel in the US, so reputational damage must be totted up
too. Including recalls and compensation, Bernstein
estimates a low-end $2bn fine would take 4 off the share
price, while a top-of-the-range $18bn fine would cost 35
per share.

Volkswagen AG Stock Price (XETRA:VOW)

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

This reckoning includes only the US at 13% of the total

VW sales last year.
Michael Steel, an environmental lawyer at Morrison
Foerster, believes VW and the EPA will most likely end up
with a settlement that could include a civil penalty of
around $1 billion. $1b derived by looking at historical
expenses in comparison to initial fine amounts.
$162 (Sep 18) -> $106 (Sep 22)
~35% decrease in price after CEO admits rigged tests.
Considering 15% of revenues from VW, if price is basic
proxy of revenues, ~5% (0.35*0.15) of TOWR revenues will
be affected in short-term. In best case scenario, loss of VW
sales will be redistributed to other auto manufactures that
TOWR services. No material impact to consumer demand.

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

Cash Flow Schedule

Quarterly Data
Tower International Cash Flow Schedule
(USD in Millions)
Cash Flow Schedule
Net Income from Cont. Operations
Depreciation & Ammortization
Pension
Stock Based Comp
Changes in Working Capital
Net Cash from Operating Activities
CapEx
Free Cash Flow
Debt Paydown
Cash Flow

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

Source: Company Filings, Management Guidance, Equity Research