January 22, 2015 American Axle & Manufacturing Holdings Inc. (AXL-NYSE) NEUTRAL Current Recommendation Prior Recommendation Underperform Date of Last Change 05/07/2013 Current Price (01/21/15) $24.14 Target Price $25.00 SUMMARY American Axle reported earnings of $0.63 in the third-quarter 2014, in line with the Zacks Consensus Estimate and 50% better than the third quarter of 2013. The year-over-year improvement was driven by strong cash flow and enhanced profits, backed by improved sales, productivity and operational stability. Revenues increased 15.8% to $950.8 million, marginally surpassing the Zacks Consensus Estimate of $949 million. American Axle is poised to benefit from its backlog of new and incremental business, along with its efforts to increase non-gm sales. However, pricing pressure by original equipment manufacturers and high dependence on GM remain concerns. Thus, we are maintaining a Neutral recommendation on American Axle. SUMMARY DATA 52-Week High $24.28 52-Week Low $16.40 One-Year Return (%) 15.23 Beta 1.84 Average Daily Volume (sh) 1,135,654 Shares Outstanding (mil) 76 Market Capitalization ($mil) $1,835 Short Interest Ratio (days) 10.23 Institutional Ownership (%) 92 Insider Ownership (%) 1 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 16.0 Earnings Per Share (%) 6.5 Dividend (%) N/A using TTM EPS 9.9 using 2014 Estimate 10.7 using 2015 Estimate 9.4 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Below Avg., Type of Stock Mid-Growth Industry Auto/Truck-Orig Zacks Industry Rank * 53 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 751 A 740 A 703 A 737 A 2,931 A 2013 756 A 800 A 821 A 831 A 3,207 A 2014 859 A 947 A 951 A 927 E 3,684 E 2015 957 E 1,007 E 1,011 E 1,038 E 4,013 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.61 A $0.55 A $0.07 A -$0.02 A $1.21 A 2013 $0.23 A $0.34 A $0.46 A $0.70 A $1.76 A 2014 $0.44 A $0.67 A $0.63 A $0.51 E $2.25 E 2015 $0.60 E $0.66 E $0.65 E $0.67 E $2.58 E Projected EPS Growth - Next 5 Years % 8 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW American Axle & Manufacturing Holdings, Inc. (AXL) is a leading supplier of driveline systems, modules and components for the light vehicle market. The company makes axles, driveshafts and chassis components for light trucks, sport utility vehicles (SUVs) and passenger cars. It has a 38% share of the driveshaft market in the U.S. and an 11% share across the world. Driveline systems are components that transfer power from the engine to the driving wheels of a vehicle. The principal manufacturing facilities of American Axle are located in the U.S. (Michigan, New York and Ohio), Brazil, Mexico, Germany, India, China, Japan and the U.K. Its major customers include General Motors and Chrysler. The North American market alone accounts for about 91% of annual revenues. Among the company s diverse products, rear and front axles as well as driveshafts contribute about 82% to annual sales, while drivetrain components, forged products, and others generate the remaining 18%. About two-thirds of the sales are of light trucks. REASONS TO BUY American Axle s backlog of new and incremental business launching from 2014 through 2016 is valued at $900 million in future annual sales. Of this, $400 million was launched in 2014, $300 million is scheduled for launch this year and $200 million in 2016. About 70% of the backlog relates to allwheel-drive (AWD) and rear-wheel-drive (RWD) applications for passenger cars, crossover vehicles and driveline applications for the commercial vehicle market. Furthermore, about 70% of the new and incremental business backlog is for programs sourced outside the U.S. The new business should help the company maintain compounded annual growth rate of about 11 12%, double the expected industry growth rate, till 2015-end. American Axle s efforts at diversifying its customer base are generating incremental revenues. Apart from General Motors (GM) and Chrysler, the company supplies driveline systems and other components to PACCAR Inc., Ford, Harley-Davidson, Volkswagen, Nissan, Tata Motors and various other original equipment manufacturers (OEMs). In 2013, the company s non-gm sales jumped 17% to $926.7 million from $792.6 million in 2012. It increased 36.5% year over year to $882.7 million in the first nine months of 2014. The non-gm sales are expected to grow to $1.2 billion, excluding the sales from the Chinese joint venture for 2014. Moreover, 70% of the backlog of new and incremental business launching from 2014 through 2016, is for non-gm customers. American Axle is undergoing significant expansion of its manufacturing footprint in Asia, where growing demand for vehicles is enhancing production volumes. The company expects to accelerate the expansion of its high-quality, cost-competitive and operationally flexible global manufacturing footprint in Brazil, China, India, Mexico, Poland and Thailand. Apart from manufacturing facilities, it also has business and engineering offices in China, India and South Korea. American Axle s cash flow has improved. Cash flow from operations in the first nine months of 2014 totaled $231.6 million, compared with $102.3 million in the same period of 2013. American Axle had free cash flow of $83.9 million in the period, compared with $46.6 million in the first nine months of 2013. Equity Research AXL Page 2
REASONS TO SELL American Axle depends significantly on GM for its sales. About 68% of its consolidated net sales in the first nine months of 2014 were made to GM. In 2013, 71% of consolidated net sales were made to GM. While the company is trying to diversify its customer base, the high dependence on GM makes it vulnerable to production cuts by the latter. American Axle s major OEM customers are constantly demanding concessions in the form of lower prices. This has been affecting the company negatively. American Axle is exposed to platforms that have faced the maximum production cuts. The company earns a significant portion of its revenues from products supporting RWD light truck and SUV platforms in North America. However, many factors are hampering sales and output levels of these light trucks and SUVs. These include shifts in product mix favoring other types of light vehicles (such as front-wheel drive-based crossover vehicles and passenger cars), changes in demand, fuel prices and government regulations (such as the Corporate Average Fuel Economy regulations). RECENT NEWS American Axle's Q3 Earnings Grow 50% Y/Y Oct 31, 2014 American Axle posted earnings of $0.63 in third-quarter 2014, in line with the Zacks Consensus Estimate. The figure demonstrated an improvement of 50% from adjusted earnings of $0.42 in the third quarter of 2013. Net income surged an astounding 51.4% to $48.6 million from $32.1 million in the third quarter of 2013. The year-over-year upside in profits was driven by strong cash flow and enhanced profits, backed by improved sales, productivity and operational stability. Revenues went up 15.8% to $950.8 million from $820.8 million in the third quarter of 2013. Also, the figure marginally surpassed the Zacks Consensus Estimate of $949 million. In third-quarter 2014, American Axle s content-per-vehicle dollar value of product sales supporting customers North American light truck and SUV programs increased 7.4% to $1,676 from $1,560 in the year-ago quarter. The content-per-vehicle also improved from $1,640 recorded in the second quarter of 2014. Meanwhile, the company s non-gm sales rose 26.5% to $296.8 million from $234.7 million recorded in the year-ago quarter. Gross profit improved 19% to $149.1 million or 15.7% of sales in third-quarter 2014 from $125.3 million or 15.3% of sales in the year-ago quarter. Meanwhile, operating income surged 26.1% to $85.1 million or 9% of sales from $67.5 million or 8.2% of sales a year ago. Financial Position American Axle had cash and cash equivalents of $219 million as of Sep 30, 2014, up from $154 million as of Dec 31, 2013. Long-term debt stood at $1.54 billion as of Sep 30, 2014, down from $1.56 billion as of Dec 31, 2013. Cash flow from operations in the first nine months of 2014 totaled $231.6 million, compared with $102.3 million in the same period of 2013. Net capital spending of the company stood at $147.7 million as Equity Research AXL Page 3
against $172.4 million a year ago. Therefore, American Axle had free cash flow of $83.9 million in the period, compared with $46.6 million in the first nine months of 2013. VALUATION Currently, shares of American Axle are trading at 10.7x our 2014 EPS estimate of $2.25. The company s current trailing 12-month earnings multiple is 9.9x, compared with the 16.7x average for the peer group and 18.6x for the S&P 500. Over the last five years, the company s shares have traded in a range of 3.7x to 31.4x trailing 12-month earnings. The stock is trading at a discount to the peer group based on forward earnings estimates. The current is at a 23% discount to the peer group for 2014. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the overall market. Our target price of $25.00, which is 11.1x our 2014 EPS estimate, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low American Axle & Manufacturing Holdings Inc. (AXL) 10.7 9.4 8.0 5.9 9.9 31.4 3.7 Industry Average 13.9 19.7 13.6 10.2 16.7 122.9 12.4 S&P 500 16.1 15.1 10.7 15.9 18.6 19.4 12.0 Meritor Inc. (MTOR) 10.9 9.1 29.0 8.6 15.2 104.1 3.5 Dana Holding Corporation (DAN) 9.5 7.9 12.4 4.8 10.4 53.9 6.9 Cooper-Standard Holdings Inc. (CPS) 8.4 6.6 N/A 4.3 29.2 34.7 13.5 WABCO Holdings Inc. (WBC) 15.2 12.9 17.5 14.8 17.7 66.8 8.4 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA American Axle & Manufacturing Holdings Inc. (AXL) 10.3 46.0 7.5 175.8 9.0 0.0 8.3 Industry Average 2.6 2.6 2.6 19.9 0.9 0.6 10.2 S&P 500 5.1 9.8 3.2 24.8 N/A 2.0 N/A Equity Research AXL Page 4
Earnings Surprise and Estimate Revision History Equity Research AXL Page 5
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of AXL. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1110 companies covered: Outperform - 17.1%, Neutral - 77.0%, Underperform 5.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research AXL Page 6