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Hoang Quoc Anh
Hoang Quoc Anh
Articles (281)  | Author's Website |

American Axle & Manufacturing Is Cheap Right Now

The company is diversifying its customer base and product offerings

American Axle & Manufacturing Holdings Inc. (NYSE:AXL) is one of the largest manufactures of driveline, powertrain, metal forming and casting products to automobile companies.

Nearly two-thirds of its revenue is derived from General Motors (NYSE:GM) and 18% is from Fiat Chrysler (NYSE:FCAU). The heavy customer concentration is not a good thing, as the business' performance relies mainly on these two customers. Any problems either GM or Fiat may have could spell trouble for American Axle. In order to combat these issues, the company diversified by acquiring Metaldyne Performance Group Inc. (NYSE:MPG) in April 2017. Since then, its share price has moved up, but the market still cheaply values Axle's potential.

Diversifying customer base and product offerings

With the acquisition of Metaldyne, revenue from GM has dropped significantly, from 67% to 41%, while Fiat contributed only 14% of total revenue. Ford’s (NYSE:F) revenue share increased from 1% to 7%. By 2020, the company expects to have three big customers: GM (32%), Ford (16%) and Fiat (16%).

In addition, 70% of the company’s incremental $1.5 billion in backlog orders between 2017 and 2019 is non-GM-related business. Indeed, the customer concentration rebalance helped Axle diversify risks away from GM.

Source: American Axle’s presentation

Acquiring Metaldyne also helped the company diversify its product offerings. From 2014 to 2016, more than 80% of its revenue came from axles and driveshafts. After the acquisition, the company’s driveline business only accounted for 52% of total revenue. Metal forming and powertrain’s revenue share expanded to nearly 37%. The acquisition also added new casting product offerings.

Source: American Axle presentation

Innovation following automobile megatrends

American Axle is also focusing on product innovation along with the global megatrends in automobiles. The number of patents the company holds has increased to 900 for innovative technologies. According to KPMG's survey of global automotive executives in 2017, the  most important trends to 2025 are electric and hybrid vehicles.

Following the global trend, Axle has come up with Quantum technology and several new products for electric and hybrid vehicles, including EcoTrac AWD Systems and e-AAM driveline systems. 

In a statement, Phil Guys, American Axle's vice president of global product engineering and chief technology officer, said the driveline technology reduces axle weight while increasing efficiency.

"Quantum's 20 percent power density increase comes with a minimum 30 percent mass reduction at the same torque capacity," he said. "For a heavy-duty pickup, Quantum provides more than 100 pounds of vehicle weight savings. It is significantly more efficient without any reduction in performance."

Quantum technology, along with Axle's new product offerings, will improve vehicle performance and passenger safety. 

American Axle is also expanding its business to China, the largest overseas market. The company has a joint venture with Lizhou Wuling, a subsidiary of Guangxi Automobile Group, to make driveline systems for SAIC – GM and Wuling’s SUV and MPV models. Initially, this joint venture is expected to produce annual revenue of $25 million. 

Very cheap for now

For the full year, American Axle expects revenue to be $7.1 billion. With an expected EBITDA margin of 18%, 2018 earnings before interest, taxes, depreciation and amortization will be approximately $1.25 billion. Because of its acquisition of Metaldyne, the company's long-term debt level has been pushed up to $4 billion.

What makes me interested is the stock is American Axle's cheap valuation at only 4.5 times EBITDA. It’s also cheaper compared to its peers, including Cummins (NYSE:CMI) and BorgWarner (NYSE:BWA). Cummins is trading at 8 times EBITDA while BorgWarner has an EBITDA multiple of 7.5 times.

For 2018, Axle's expected operating performance includes the restructuring expenses incurred from the acquisition of Metaldyne. By 2020, the company's bottom line should improve significantly due to the synergies realized from the deal, the new technological products which fit the global automotive megatrends and the expansion in the Chinese market. I consider it to be a buy.

About the author:

Hoang Quoc Anh
Chief investment strategist for the Global Hidden Gems Portfolio (https://ghginvest.com). Searching around the world for stocks that trade below net cash but are still profitable.

Visit Hoang Quoc Anh's Website

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