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Analyst Blog

On Jul 4, we maintained our Neutral recommendation on American Axle and Manufacturing Inc. (AXL - Analyst Report). Though we are bullish about the company’s focus on diversification and geographic expansion, we are disappointed with the company’s year-over-year decline in profits. We are also concerned about the weak SUV demand, high commodity costs and pricing pressure by OEMs.

Why the Reiteration?

On May 3, American Axle reported earnings of $18.6 million or 23 cents per share before debt refinancing and redemption costs in the first quarter, down 62.3% from 61 cents per share in the comparable quarter of 2012 (excluding special items). Nevertheless, earnings surpassed the Zacks Consensus Estimate of 15 cents.

Revenues of $755.6 million in the quarter were slightly higher compared with $751.5 million in the first quarter of 2012, but missed the Zacks Consensus Estimate of $757 million. The company’s revenues reflect the adverse impact related to the labor strike at General Motors’ Rayong plant in Thailand.

Following the release of the first quarter results, the Zacks Consensus Estimate for 2013 remained flat at $1.72 per share. However, the Zacks Consensus Estimate for 2014 went up 4.7% to $2.70 per share.

American Axle focuses on diversifying its customer base, which will boost revenue generation. The company supplies driveline systems and other components to different automakers and OEMs. In addition, the company is continuously developing its customer relationship with auto companies including Renault, Nissan Motor Co. (NSANY), Tata, Mahindra, Cherry, Brilliance and others.

In addition, the company will have favorable impacts from expansion in Asia, due to the rising demand for vehicles in the region. American Axle also plans to expand its manufacturing footprint in Brazil, China, India, Mexico, Poland and Thailand.

However, we are worried about the constant pricing pressure from the major OEMs. In addition, the company is exposed to platforms, which faces maximum production cuts. Sales and output levels of RWD light truck and SUV in North America are declining over time, which occupies a substantial portion of the company’s revenues.

Other Stocks to Consider

Some stocks that are performing well in the industry where American Axle operates include Gentherm Inc. (THRM - Snapshot Report) and Magna International Inc. (MGA - Analyst Report). Both carry a Zacks Rank #1 (Strong Buy).

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