American Axle & Manufacturing Holdings Inc. (AXL, Financial) was established over 100 years ago by General Motors (GM, Financial) and has been one of the automaker's biggest suppliers of engines and drivetrain components ever since. After a very close call during the housing crisis, when the stock traded below $1 per share, it has been roaring back to strength with year-over-year growth since 2009.
While the company is wildly profitable once again, the stock still lags behind. Over the last 12 months, American Axle earned $277 million on $5.48 billion in revenue. Since 2009, the company’s book value has gone from red to black, and now sits at $12.87.
American Axle continues to produce solid results. Operating margins are not horrible at 8.5% and the company generates over $500 million in operating cash flow. The question is, for how much longer?
The company raised full-year guidance and could earn over $3.65 per share in 2018. With the stock at $18 a share, that makes it a pretty attractive trade. In fact, big hedge funds run by Jim Simons (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) have small positions in the auto parts supplier.
American Axle serves a useful function in the marketplace. With continued technology advancements in robotics and artificial intelligence, the future could be very bright for the company.
One problem lies in the company’s debt, however, which explains why the stock has a 26% short interest. This is long-term debt, though, which was added through its acquisition of Metaldyne Performance Group last April. The debt has not translated into high interest expenses yet, but could weigh on earnings if the combination does not produce gains to offset the $3.3 billion price tag.
The deal is meant to reduce American Axle's reliance on General Motors, its largest customer, and generate almost $7 billion in revenue. If the current margins hold up, its earnings per share should as well. Plus, the company has already seen the bulk of the $120 million in cost reductions it predicted for the first two years after the deal's close. The deal was necessary from a business standpoint since General Motors is starting to make full-size trucks in house.
The other challenge is sales of new cars and light trucks in the U.S. The demand has backed off slightly from 2016's record, and declines are likely to continue this year.
The good news is American Axle has begun to chip away at its debt, recently paying down $200 million in senior unsecured notes that would have been due in 2019. Going forward, the company should be able to generate enough free cash flow to pay down borrowings.
All in all, this is a good sign for the longevity of its business. In addition, with return on equity and invested capital in the double digits, the company should continue to grow its value. Debt aside, the 20% earnings yield is attractive enough for at least a flyer.
Disclosure: I am not long/short any stocks mentioned in this article.
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