Investors Aren't Buying American Axle's Self-Improvement Story

There are more than a couple puzzlingly cheap (or cheap-looking) auto and truck component stocks these days. While production is certainly weakening, the market seems to be pricing in a rather drastic decline in volumes, revenue, and profit margins. To be fair, this sector doesn't have a great track record of earnings "through thick and thin", with quite a few companies sporting low single-digit long-term average FCF margins, but that also doesn't give much if any credit to the margin and liquidity structure improvements these companies made during the good times.

American Axle & Manufacturing (AXL) ("AAM") looks cheap enough that I wonder what I'm overlooking, as low-to-mid single-digit revenue growth and FCF margins averaging out in 4% to 5% range would support a fair value in the $19 to $20 range. What's more, AAM is well-placed to benefit from ongoing efficiency efforts in internal combustion engine (or ICE)-powered cars, a global preference for SUVs/CUVs, and the transition to electrification. Then again, there's a lot of debt on the balance sheet, and a lot of customer concentration risk, and projecting a significant improvement in long-term FCF margins may just be a different form of the loss-producing mantra "it's different this time".

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Investors Aren't Buying American Axle's Self-Improvement Story