American Axle & Manufacturing Holdings, Inc. (NYSE: AXL) is a supplier to the automotive industry. Specifically, the company manufactures, engineers, designs, and validates driveline / drivetrain systems and related components for passenger vehicles. Driveline and drivetrain systems are primarily responsible for transferring power from a vehicle’s transmission to its drive wheels.
AXL is the principal supplier of drivetrain components to General Motors (NYSE: GM) for its real-wheel drive (RWD) light trucks and SUV’s manufactured in North America. Sales to GM made up approximately two-thirds of the company’s net revenue in 2016. AXL operates more than 90 facilities across 17 countries including Brazil, China, India, and Japan. The company is headquartered in Detroit, Michigan.
Products and Services
AXL primarily operates in the driveline market, which consists of driveline, drivetrain, and related components, including metal-formed products and chassis modules for light trucks, SUVs, crossover vehicles, passenger cars, and commercial vehicles.
The company has made significant investments in research and development, and hopes to further diversify its product portfolio. Some of these innovations include:
EcoTrac Disconnecting AWD System – a driveline system that disconnects when not needed to improve fuel efficiency and reduce emissions.
e-AAM Hyrbid & Electric Drivelines – power dense systems for hybrid and electric vehicles that can easily be integrated into multiple vehicle platforms.
QUANTUM Technology – a series of new lightweight axles and drive units that significantly reduces mass.
As noted above, the company’s primary customer is GM, which uses AXL as the sole-source supplier for certain axles and drivelines in some vehicles. The company also supplies driveline system products to FCA US LLC (FCA) for full-size RAM pickup trucks, all-wheel drive Jeep Cherokees, and certain passenger cars. Sales to FCA accounted for approximately 18 percent of net sales in 2016. In addition to GM and FCA, AXL’s customers include Nissan, Mercedes-Benz, Volkswagen, Audi, Jaguar Land Rover, Honda, Ford, PACCAR, Daimler Truck, Volvo, Harley-Davidson, and other manufacturers.
Below is a summary of AXL’s total revenues attributable to each product category:
Source: Company Reports
AXL assumes the U.S. seasonally adjusted annual rate (SAAR) of light vehicles will be approximately 17.5 million for 2017 through 2019, which is lower than some other projections:
Source: Company Presentation
Therefore, there is some room for growth over current projections is the SAAR is stronger than anticipated.
Over time, the North American vehicle production mix has shifted towards trucks, SUVs, crossovers, and vans, and the company expects this trend to continue through 2020:
Source: Company Presentation
Due to its customer base and product mix, AXL is well-positioned to benefit from continued strength in pickup trucks / SUVs and increasing demand for crossover vehicles. Furthermore, while internal combustion engines are expected to be the main source of vehicle power for at least the next decade, AXL’s investments in hybrid and electric systems should allow the company to capitalize on the success of low-emission vehicles.
On April 6, 2017, AXL completed its acquisition of Metaldyne Performance Group (originally announced in November 2016). Total consideration paid was $1.6 billion in cash and stock, and the assumption of $1.7 billion in net debt.
The combined entity will have a strong position in powertrain, drivetrain, and driveline. In addition to building out legacy product lines, the acquisition should grow AXL’s exposure to the commercial and industrial markets. Another benefit of the merger is a more diversified customer base.
Source: Company Presentation
As shown in the company’s 2016 pro forma sales, the combined entity’s revenue attributable to GM falls to 42 percent, and is projected to total less than one-third of revenue by 2020. AXL also expects to significantly diversify its international customer base.
AXL is estimating between $100 million and $120 million in annual synergies coming from reductions in overhead costs ($45-$50 million), more efficient purchasing ($45-$50 million), and manufacturing initiatives ($10-$20 million). The company hopes to achieve 70 percent of these annual savings by the end of the first full year operation.
First Quarter Earnings Review
Revenue for the first quarter increased eight percent year-over-year to $1.05 billion. This was helped by an increase in non-GM sales to a record of $347.1 million. The company also achieved a record-high gross margin of 20.1 percent. SG&A expenses were roughly flat from the first quarter of 2016, totaling $82.8 million.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which excludes restructuring costs, increased 23 percent year-over-year to $183.6 million, yielding an adjusted EBITDA margin of 17.5 percent. Adjusted free cash flow, defined as free cash flow excluding cash payments for restructuring, was $60.5 million.
At March 31, 2017, the company listed cash and equivalents of approximately $1.5 billion, and long-term debt of approximately $2.6 billion.
Since the first quarter of 2017 did not include the impact of the Metaldyne acquisition, AXL issued an updated financial outlook for the full-year. Among other things, the company notes the following:
- Revenue of $6.1 billion, which excludes Metaldyne sales between January 1, 2017, and April 5, 2017;
- Adjusted EBITDA margin between 17 and 18 percent, consistent with 1Q; and
- Adjusted free cash flow equal to approximately five percent of sales, slightly lower than 1Q.
As noted above, the company listed approximately $2.6 billion of long-term debt, which likely increased by $1.7 billion post-acquisition. The company provided the following capital projections:
Source: Company Presentation
While the projected leverage ratios are expected to decrease steadily over time, they are significant in the early years of the deal (3.5x initially, and potentially higher than that). This is somewhat offset by the fact that the company does not have significant debt maturing prior to February 2019 and is generating positive cash flows.
- Changes to the company’s capital structure;
- Significant changes to customers and/or product lines;
- Changes in the U.S. SAAR; and
- Further M&A activity.
- The company is dependent on sales to GM and FCA;
- The company has significant debt due to the Metaldyne transaction;
- The company is dependent on the automobile market which is sensitive and relies on the availability of consumer credit;
- The company may not be able to integrate the assets of Metaldyne as anticipated; and
- The company is exposed to fluctuations in commodity prices which are difficult to pass along to customers.
As of May 31, 2017, shares of AXL closed at $15.11 down less than one percent on the day. In the past year, the shares traded as low as $12.61 (shortly after the Metaldyne acquisition was announced) but rallied to $20.88 in late January. Year-to-date, AXL is down more than 20 percent. Shares trade at a very reasonable 4.5 times trailing earnings of $3.30 per share.
Following are selected analyst ratings and price targets:
|Ryan Brinkman||J.P. Morgan||Overweight||$23.00||5/8/2017|
AXL’s acquisition of Metaldyne addressed many of the company’s underlying issues, including its lack of customer diversification. Furthermore, greater scale should provide cost savings and help the company expand into new product lines and territories. The remaining concern is leverage, both financial and operational. An extended period of weakness in the automobile market could have a material impact on AXL. Still, the company is generating positive cash flows which are expected to improve as Metaldyne’s operations are integrated. Therefore, the upside price targets of $23-$24 seem to be more representative of the company’s long-term prospects.
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