American Axle: Better Near-Term Profits, But Long-Term Questions Remain

Writing about American Axle (AXL) six months ago, I said that I saw upside into the low double-digits on improved operating leverage and recovering passenger vehicles builds. The shares have since risen about 45% since then (into the low double-digits at $11.42), outperforming names I liked better like BorgWarner (BWA) and Valeo (OTCPK:VLEEY), but not keeping pace with Dana (DAN). I attribute at least some of this outperformance to the outsized operating leverage at American Axle relative to many other companies, as well as underappreciated execution on costs.

American Axle is a tough stock to evaluate today. I’m not that impressed with American Axle’s positioning for electrification, and the company’s still-high debt limits the company’s ability to do much through M&A. On the other hand, the company has made meaningful cost efficiency improvements and if capex can stay in the $300M area for a while, there’s good FCF potential in the near term.

So much comes down to how revenue holds up. With a gradual decline in revenue starting around 2024/2025, these shares would still have solid upside from here, but as with Tenneco (TEN), the high level of leverage means that even small changes in modeling assumptions drive big changes in the fair value.

 

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American Axle: Better Near-Term Profits, But Long-Term Questions Remain