American Axle Looking Underappreciated Today, But The Uncertain Future Is A Major Overhang

A year ago I thought the market was being too harsh on American Axle (NYSE:AXL), underrating the company’s ability to survive the transition to electric vehicles and giving the company little credit for the cash flows to be earned over the sunset of internal combustion (or ICE) powertrains. Since then, the shares have risen about 25%, not too shabby over a period where most other parts suppliers are down by double-digits, and I believe only Visteon (VC) has managed double-digit appreciation without a buyout.

While American Axle has been looking stronger of late, and I applaud the company’s ability to adjust its expense structure to lower volumes, the investment case is quite a bit more difficult now. High leverage makes valuation sensitive to even relatively small changes in long-term growth rate or margin assumptions, and the company is still facing a difficult ICE-to-EV transition. I don’t think it’s a stretch to argue for a mid-teens fair value today, but I’d be careful about an extended commitment to this name.

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American Axle Looking Underappreciated Today, But The Uncertain Future Is A Major Overhang

American Axle - Ample Risks, But Maybe Ample Rewards Too

 

Credit where due – in a tough operating environment, American Axle (AXL) is doing pretty well, and management deserves credit for that, as well as the ongoing balance sheet clean up. While the company’s leverage to SUVs and light trucks doesn’t seem to be making a huge difference in terms of near-term revenue performance versus other auto companies I follow, I do expect the company to benefit from OEM efforts to rebuild inventories in these high-value categories as semiconductor shortages ease in 2022.

The key bear argument remains the risk of electrification and how American Axle will fare in an EV world. With a lackluster eDrive offering today, little exposure to higher-value components, and high exposure to General Motors (GM), one of the auto OEMs pledging to in-source EV powertrain content, the long-term revenue cash flow could certainly be at risk. Then again, American Axle has multiple ways to play in the EV future, and the bear case may be overlooking too much of that.

Particularly now that the shares are down about 20% since my last update, I’m warming up to this stock. I already own BorgWarner (BWA) and Valeo (OTCPK:VLEEY) (OTCPK:VLEEF), and I think they’re better positioned for the EV future, so I’m not really in the market for another passenger vehicle-oriented supplier, but the undervaluation/return potential is really starting to stand out to me.

 

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American Axle - Ample Risks, But Maybe Ample Rewards Too

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

American Axle Outperforms On Costs, But Long-Term Revenue Leverage Is Still Debatable

It’s likely true that internal combustion engines will be with us for a quite a while, and particularly with respect to pick-ups, but I still believe exposure to electrification is important and American Axle & Manufacturing’s (AXL) (“American Axle”) relatively weak positioning here, not to mention its high leverage and dependence on the U.S. market, have been negatives in my view of the stock’s potential.

The shares are down about 20% since my last update, underperforming names I’ve preferred like BorgWarner (BWA), Dana (DAN), and Valeo (OTCPK:VLEEY). While I do believe the liquidity concerns that hammered the shares down into the $2s are largely over and done with, the company’s leverage to light trucks remains a mixed blessing in my book, and I remain concerned that the company doesn’t really have the wherewithal to be a big player in areas of the market that offer more growth. That said, while I don’t really like the company’s strategic positioning, the shares could still have upside into the low teens if U.S. SAAR numbers continue to beat expectations as the auto recovery unfolds.

 

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American Axle Outperforms On Costs, But Long-Term Revenue Leverage Is Still Debatable

Some Progress At American Axle, But Plenty Left To Prove

American Axle & Manufacturing (AXL) (“AAM”) has had a volatile run since my last update on the shares. I wasn’t all that favorably inclined towards the company due to its heavy reliance on the U.S. market and long-term margin/efficiency issues, but I thought the valuation assumed a pretty dire outlook. Since then, the shares are down another 20%, with the stock dropping about 50% at the worst point (hurt by the strike at GM (GM) ) and then rebounding strongly on third quarter results.

Unless you think the U.S. pickup market is going to be substantially stronger in 2020, it’s hard to get really excited about the near-term outlook. AAM has definitely made progress on its cost structure and operating flexibility, but customer and product concentration remains a risk, as does the high level of net debt. Given that leverage, AAM is the sort of stock that could work out really well if things go even moderately better than expected, but it’s also the sort of stock that could crater if demand weakens further and/or the company has execution issues that lead that heavy debt load to loom even larger.

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Some Progress At American Axle, But Plenty Left To Prove

Dana Caught Up In Several Cross-Currents

I was puzzled by Dana’s (DAN) valuation back in October, thinking that the shares looked undervalued even factoring in a weaker near-term outlook for light vehicles and an eventual end to the heavy truck boom. Lending some support to my notion that stocks don’t move up just because they’re cheap, the shares are more or less in the same place now (down about 5%), albeit with a steep drop into the close of 2018 and a rally in the interim.

Now Dana is in the middle of that light vehicle slowdown, and heavy trucks in North America are enjoying an extended peak, but orders have been plunging. Meanwhile, heavy off-road machinery has been looking a little wobbly lately. So even though Dana has built up a strong electrification portfolio that management believes will help drive revenue to over $10 billion in 2023, nobody seems to believe that today. With the shares undervalued even at lower long-term growth rates, valuation remains a head-scratcher and I’m increasingly tempted to take a flyer on this name.

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Dana Caught Up In Several Cross-Currents

American Axle Working Through Operational Challenges And A Pessimistic Street

Almost a year ago, I was leery of investing in American Axle (AXL) (or "AAM") ahead of a decline in the auto and light truck sector, even though the valuation was curiously undemanding, and the shares are down a further 20% from that point (with a steeper dive into the end of 2018). Mix and company-specific issues certainly explain some of the relative weakness next to names like Meritor (MTOR) and Dana (DAN), but valuation is curiously weak relative to published sell-side estimates over the next two years.

As was the case a year ago, I'm intrigued by the seemingly low valuation, but it also makes me paranoid as to what I may be missing. I'm not overawed by AAM's mix and its relatively modest leverage to the hybrid/EV migration, but I also believe it will take longer for light trucks to convert to those alternative power sources. I also don't like the high debt level, nor the lack of diversification outside the U.S. (though that doesn't seem so bad right now). This one goes on my watchlist simply because of the curiously low valuation, but I'm still scratching my head as to why that valuation does look so low.

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American Axle Working Through Operational Challenges And A Pessimistic Street

Allison Transmission Remains Hard To Value In An 'EV Someday...' World

What do you do with a very well-run company that enjoys exceptional margins and would still seem to have room to grow share, but is also looking at a possible sea change in its core addressable market that may leave it with much lower content shares and margins? That’s the conundrum with Allison Transmission (ALSN) today; management continues to execute well and generate fantastic margins and cash flows for a commercial vehicle components company, but the advent of electrification in commercial trucks threatens its entire business structure.

I do believe that commercial vehicle electrification is a “when, not if” situation, but that leaves plenty of uncertainty over timing, not to mention content (some commercial EVs will still have transmissions). Likewise, while Allison is investing in EV technologies of its own, it’s unlikely to enjoy the same sort of share and margins, but how big will the change be?

I generally make it a policy to step aside if I don’t feel like I have a great handle on valuation, and that applies here to some extent. I’m really not worried about Allison’s future over the next five years or so, but I’d need a price closer to $40 to coax me in.

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Allison Transmission Remains Hard To Value In An 'EV Someday...' World

Dana Looks Pinned Under The Wall Of Worry

I was tentatively bullish on Dana (DAN) in late May of this year, but auto and commercial vehicle suppliers continue to weaken in the market, and the shares are down another 15% since then. Maybe I’m missing something big here, but I see Dana as a company with at least decent ongoing leverage to passenger vehicles, an improved position in electrification, and a solid global presence in commercial/off-road vehicles, particularly with the Oerlikon (OTCPK:OERLY) transaction. And yet, the Street continues to price this one as if there’s going to be serious long-term erosion in the business.

I freely admit that Dana doesn’t have the greatest operational track record with respect to margins, FCF generation, and/or ROIC, but the company has improved in recent years and is seemingly getting no credit for that. In a market where many auto and commercial vehicle suppliers appear to be trading below long-term fair values investors certainly have choices, but I continue to believe this name is worth a look.

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Dana Looks Pinned Under The Wall Of Worry

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

Seeking Alpha: Dana Holding Still Good, But Not So Cheap

Back in the spring of this year, I thought Dana Holding (NYSE:DAN) looked like a good name to own in the commercial vehicle components/parts space. Since then, the shares have outperformed a range of rivals and comps, including American Axle (NYSE:AXL), Federal Mogul (NASDAQ:FDML), GKN plc (OTCPK:GKNLY), and Cummins (NYSE:CMI) (a commercial vehicle comp, but not a competitor), but have lagged the S&P 500 in part due to weaker-than-expected demand for trucks in South America and weaker global demand for ag equipment. I still believe there's a solid margin improvement story here (one that management is delivering), leverage to emerging market growth, and the potential for value-adding M&A, but the undervaluation of the shares isn't enough to call it a must-buy today.

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Dana Holding Still Good, But Not So Cheap

Seeking Alpha: Dana Doing Well, And The Cycle May Be Getting Better

Dana Holdings Corp's (DAN) strong 2013 momentum broke in a big way in late October when the company warned that revenue and EBITDA would come in about 4% to 6% lower than expected. Weaker commercial/off-highway markets and emerging market currencies shouldn't have been such a big surprise, but expectations were rising and Dana management has had some challenges with short-term forecasting.

Dana has regained a lot of the lost ground since then, but more could still be in store. The company is still not getting full credit for its margin expansion intentions, nor the potential to increase its mix of profitable business as cyclical markets swing back to the positive. It is difficult to trust any vehicle components/parts manufacturer as a long-term holding, but Dana is worth a look for readers who believe that commercial, off-highway, and passenger vehicle markets could be looking at better days.

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Dana Doing Well, And The Cycle May Be Getting Better

Seeking Alpha: Can Dana Do What So Few Parts Companies Can?

It hasn't exactly been difficult to find winning auto parts/components stocks over the past year, but Dana (DAN) has nevertheless enjoyed a good run - up more than 80% and within a hair's breadth of its 52-week high as of this writing. There are definitely a lot of things to like about Dana - it has a pretty good balance sheet (for a parts/components company), it has a good recent history of margin improvements, and a very diverse and balanced business.

The question is whether the good times can continue. There are certainly some near-term headwinds. Expectations for light vehicle (LV), commercial vehicle (CV), and off-highway vehicle volume growth in Europe have come down significantly, and growth in key markets like Brazil is still erratic (recently LVs have been weak, while CVs have been strong). What's more, while Dana appears to be on a good path today, the track record of companies in this industry with respect to sustained long-term free cash flow generation is not at all good. Although I do believe Dana still scores well for quality and relative value, the probable free cash flow path is a little less convincing.

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Can Dana Do What So Few Parts Companies Can?

Investopedia: Dana Looks Like A Name To Know In Parts

These are not easy times to be in the business of supplying parts and components for the passenger vehicle or commercial vehicle markets. Although U.S. auto sales have been quite good of late, business has slowed in Europe and many emerging markets, while numbers and management guidance from a host of truck, agriculture and mining OEMs has pointed to slowing trends as well.

Against that backdrop, I still think it is worthwhile for investors to take a closer look at Dana Holdings (NYSE:DAN). Numbers have come down a bit, and there are definitely risks in end-user demand for 2013, but this company's diversification across geographies, end markets, technologies and customers makes it a differentiated parts and components company. Coupled with a valuation that does not seem demanding, the stock is likewise interesting at these levels.

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Investopedia: Does American Axle Have The Horsepower To Outrun Its Balance Sheet?

There's no one right way to value a company, and that seems particularly relevant in the case of American Axle (NYSE:AXL). Investors who rely on discounted cash flow models are not likely to find much value here, as the company's huge debt load overshadows even optimistic projections for revenue and cash flow growth. On the other hand, the company is leveraged to potential demand growth in pickup trucks and looks potentially interesting on simpler valuation measures like P/E and EV/EBITDA.

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Investopedia: Industry At A Glance - Auto Parts

It doesn't seem so long ago that investing in anything related to the automotive sector seemed to be an invitation for a capital loss. Companies struggled with excess capacity, high debt and nonviable cost structures, and more than a few companies at least flirted with bankruptcy (and some made the commitment to it).


Now, though, is seems like a new industry. Many companies have worked to strip costs out of their operating structure and emerging markets have become a major growth opportunity. Though investors should not assume that this industry has shaken off its traditional cyclicality, opportunities could still be available in the sector.

BorgWarner (NYSE:BWA)
Auto part companies do not get much credit (or valuation) for technological innovation, but that seems a little unfair in the case of BorgWarner. Diesel turbochargers and dual clutch technology are both significant growth opportunities, particularly if diesel passenger vehicles become as popular in the United States as they are in Europe. BorgWarner used to pay a dividend and that could resume again as the company shores up its balance sheet. Investors should also note that BorgWarner has less exposure to U.S. automakers than many names on this list.



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http://stocks.investopedia.com/stock-analysis/2011/Industry-At-A-Glance---Auto-Parts-BWA-FDML-TEN-TRW-AXL-DAN-MOD0830.aspx

Alcoa Gives A Good Start To Earnings

American aluminum giant Alcoa (NYSE:AA) has long held the distinction of being the first major U.S. company to report in any given earnings cycle. As aluminum is a major economic bellweather, these earnings get even more scrutiny from analysts and forecasters these days. Luckily for the recovery bulls, Alcoa came through this time. 

The Quarter that Was
Alcoa reported that sales jumped 22% from last year and 6% from the prior quarter. Of that 6% growth, two-thirds came from increased shipments. Gross margins improved significantly from the year-ago period, and the company continued a strong resurgence to profitability from both the prior quarter and the year-ago period.

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http://stocks.investopedia.com/stock-analysis/2010/Alcoa-Gives-A-Good-Start-To-Earnings-AA-BA-LPX-AXL-EMR0714.aspx

Auto Parts Could Rev Up Returns

Reports of the death of the auto industry have been greatly exaggerated.

American automakers are certainly still in trouble, but there is a wide world out there and people, especially Chinese people, continue to buy cars. If people are still buying cars, that means companies are still building cars. If companies are still building cars, that means there is still business out there for auto parts companies.

Back From the DeadInvestors are right to be skeptical of the thesis that there is actually money to be made from investing in auto parts stocks. After all, many of these companies had the same problems as the U.S. automakers - stagnant sales, competition from foreign companies, outdated (and excessive) cost structures and too much debt. More than a few companies went bankrupt or flirted with bankruptcy.  (For more, see Analyzing Auto Stocks.)

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