American Axle's Market Weak

We rate the stocks of American Axle & Mfg (AXL - Analyst Report) Hold. The company's focus on diversification and geographical expansion is helping it to grow. The company's recent backlog of new and incremental business, to be launched through 2009 to 2013, is $1.4 billion in future annual sales.

However, weak SUV demand is greatly affecting AXL's sales. AXL recently reached a resolution with the United Auto Workers (UAW) to end a strike at its five plants.

The company aims to develop innovative driveline and powertrain system solutions for passenger cars, light trucks and SUVs for the global marketplace. It is undergoing a significant expansion of its manufacturing footprint in Asia. AXL has been benefiting recently from cost savings and an increase in GMT-900 volumes. The company also recently announced a cost-cutting plan that could yield benefits of about $100 million annually. It also plans to close down and idle some of its U.S.-based facilities and will launch new facilities in Brazil, China, Mexico, Poland and Thailand.

But AXL's excessive dependence on General Motors Corporation (GM) is worrisome. Rising commodity costs is negatively affecting earnings by at least $20 million annually. The agreement with UAW is expected to cost $398 million to the company. Moreover, AXL expects the strike will lower 2008 sales by $370 million with resulting revenue of $2.5 billion to $2.6 billion.

Currently, AXL's stock is trading at approximately 12.5x our 2009 EPS estimate of $1.25. Its focus on improving its product mix, diversification of client base, and outsourcing to low-cost countries are some of the positives of the stock. We set a six-month target price of $16.50.

(Read the full analyst report on AXL