Diversifying Away From General Motors

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American Axle & Manufacturing (NYSE: AXL) is a Tier I supplier to the automotive industry. American Axle manufactures, engineers, designs, and validates driveline and drivetrain systems and related components and chassis modules for light trucks, sport utility vehicles (SUVs), passenger cars, crossover vehicles and commercial vehicles. In addition to locations in the United States (Michigan, Ohio, Pennsylvania and Indiana), it also has offices or facilities in Brazil, China, Germany, India, Japan, Luxembourg, Mexico, Poland, Scotland, South Korea, Sweden and Thailand.

Business Quality

American Axle has made significant efforts to diversify its business through the growth of new and existing customer relationships and the expansion of its product portfolio. It is focused generating profitable growth with new and existing global OEM customers, as well as commercial vehicle, off- road and emerging market OEMs. Its new and expanded business launches in 2013 through 2015 include business with Honda, Jaguar Land Rover, Nissan, Tata Motors, The Volvo Group, Mercedes-Benz, and others. As of December 2012, approximately 90% of the current quoting opportunities amounting to $500 million are for customers other than GM and non‐GM sales are expected to exceed half of American Axle's total sales by 2015 from its current 30-40%. American Axle also accelerated the development and launch of products for passenger cars and crossover vehicles and the global light truck and commercial vehicle markets. Approximately 60% of its new and incremental business backlog launching from 2013 to 2015 relates to All-Wheel Drive and Rear Wheel Drive applications for passenger cars, crossover vehicles and driveline applications for the commercial vehicle market.

American Axle's product durability and reliability are driven by its commitment to high quality standards. It has an outstanding daily track record for delivering quality products, having averaged less than 10 discrepant parts per million from 2004 to 2012. Customer incidents per thousand vehicles have improved an average of 15% annually since 2006 from 14 in 2006 to 4 in 2012, resulting in improved warranty performance for customers.

American Axle's focus on cost management has led to sustainable structural reductions in its fixed cost structure. It shut down the Detroit Manufacturing Complex and the Cheektowaga Manufacturing Facility in 2012 to achieve market cost competitive labor structures and also successfully negotiated several collective bargaining agreements that cover its hourly associates into 2017. It also continued to execute lean management initiatives to improve quality, eliminate waste, reduce lead time and total costs globally.

Valuation and Financial Analysis

American Axle currently trades at a trailing twelve months P/E (excluding extraordinary items) of 11.7 and a trailing twelve months EV/EBITDA of 7.1. Amercian Axle experienced losses in 2006, 2008 and 2009 but has since recorded three consecutive years of profitability from 2010 to 2012. American Axle is highly geared with a net debt-to-EBITDA of 3.6 times. Its refinancing actions taken in 2012 mean that American Axle will not have any major debt refinancing till 2016. According to its presentation at the Deutsche Bank Global Automotive Conference in January 2013, American Axle is targeting net sales and EBITDA to exceed $4 billion and $500 million, respectively, by 2015, based on assumptions of a seasonally adjusted annual rate of 15 million units and the expected launch timing for the programs in its $1.25 billion new business backlog.

Competitor/Peer Analysis

American Axle's direct competitors include Dana Holding Corporation (NYSE: DAN) and Magna International (NYSE: MGA). Dana is a supplier of driveline products, power technologies and service parts for vehicle manufacturers globally. Magna is a diversified global automotive supplier which designs, develops and manufactures automotive systems, assemblies, modules and components for sale to original equipment manufacturers of cars and light trucks. American Axle trades at a premium to its peers based on enterprise value multiples, with Dana and Magna valued at 4.1 and 5.4 times EV/EBITDA respectively. On a trailing twelve months P/E (excluding extraordinary items) basis, its 11 times P/E lies in between that of Dana and Magna which trade at 13 times and nine times P/E respectively. Of the three, Magna comes up top on financial metrics with a gearing of only 4% and a dividend yield of 2%.

Investment Risks

American Axle has significant customer and product concentration risk. American Axle is the principal supplier of driveline components to GM for its rear-wheel drive light trucks and SUVs manufactured in North America and also the principal supplier of driveline system products for Chrysler's Ram program. GM and Chrysler accounted for approximately 73% and 10% of its fiscal 2012 net sales.

Steel and metallic materials form the bulk of American Axle's raw material needs and worldwide commodity market conditions have resulted in volatile steel and other metallic material prices in recent years. American Axle has taken steps to mitigate the impact of raw material price increases through strategic sourcing arrangements with suppliers and technology advancements that result in using less metallic content or less expensive metallic content in the manufacturing of its products.

American Axle faces potential labor cost increases and work stoppages if it is unable to maintain satisfactory labor relations. Substantially all of its hourly associates in the U.S. are represented by the United Auto Workers (UAW), a labor union which represents workers. Approximately 3,850 of American Axle's hourly associates at its facilities in Mexico and Brazil are also covered by collective bargaining agreements which expire annually.

Conclusion

American Axle is currently trading close to its 52 week high of $13.06 and does not offer a compelling investment case over its peers Magna and Dana at current valuations.


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