American Axle Stays Neutral

We are maintaining our Neutral recommendation on American Axle & Manufacturing Holdings, Inc. (AXL - Analyst Report). American Axle is a leading supplier of driveline systems, modules and components for the light vehicle market. The company manufactures axles, driveshafts and chassis components for light trucks, sport utility vehicles (SUVs) and passenger cars. The company holds 38% share of the driveshaft market in the U.S. and 11% share across the world.

The company released its third quarter earnings on October 28, 2011. American Axle realized a profit of $38.3 million or 50 cents per share compared with $38.8 million or 52 cents per share in the third quarter of 2010 (all excluding special items). Net sales in the quarter increased 5% to $647.6 million from $618.2 million in the third quarter of 2010.

Gross profit dipped to $103.5 million or 16.0% of sales from $113.9 million or 18.4% of sales. However, operating income came in at $44.5 million or 6.9% of sales compared with $60.7 million or 9.8% in the year-ago quarter.

American Axle expects sales to grow more than 5% to $2.4 billion in 2011, driven by the rebound in U.S. auto sales and turnaround performances of both of its highly exposed customers, GM and Chrysler. The company estimates 2011 U.S. light vehicle sales to increase to 12.5 million–13 million units from 11.6 million units in 2010. It also anticipates sales to grow in excess of $3 billion by 2013 on the back of new product launches.

The company is significantly expanding its manufacturing footprint in Asia, where the growing demand for vehicles is enhancing production volumes. The company expects to accelerate the expansion of its high quality, cost-competitive and operationally flexible global manufacturing footprint in Brazil, China, India, Mexico, Poland and Thailand.

Moreover, American Axle’s efforts of diversifying its customer base are generating incremental revenue. Apart from General Motors Company (GM - Analyst Report) and Chrysler, the company supplies driveline systems and other components to PACCAR Inc. (PCAR - Analyst Report), Volvo AB (VOLVY), Ford Motor Co. (F - Analyst Report) and various other OEMs. It is also developing customer relationships with Volkswagen to sell shafts to its major division, Audi, as well as Renault, Nissan Motor Co. Ltd. (NSANY), Tata Motors Ltd (TTM - Snapshot Report), Mahindra, Cherry, Brilliance and others.

However, American Axle continues to have a high exposure to General Motors and Chrysler. The constant price negotiations by the major OEM customers are affecting the company.

In addition, American Axle is exposed to platforms that have faced the maximum production cuts. The company derives a substantial portion of its revenue from products supporting RWD light truck and SUV platforms in North America whose sales and output levels are being affected by a number of factors in the recent times.

Considering all these, the shares of American Axle are also maintaining a Zacks#3 Rank reflecting a short-term “Hold” rating.