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On May 7, we upgraded American Axle and Manufacturing Inc. (AXL - Analyst Report) to Neutral based on its focus on diversification and geographic expansion. However, we are disappointed about its year-over-year decline in profits and remain concerned about the weak demand for SUV, high commodity costs and pricing pressure by OEMs.

Why the Upgrade?

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 of the year that plunged 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 during the quarter.

Revenues were $755.6 million in the quarter compared with $751.5 million in the first quarter of 2012 and missed the Zacks Consensus Estimate of $757 million. The company’s revenues reflect the adverse impact of roughly $12.5 million related to the labor strike at General Motor Company’s (GM - Analyst Report) Rayong plant in Thailand.

Following the release of the first quarter results, the Zacks Consensus Estimate for 2013 increased 3.6% to $1.71 per share. Moreover, the Zacks Consensus Estimate for 2014 also went up 2.8% to $2.55 per share. Currently, the company retains a Zacks Rank #3 (Neutral).

American Axle focuses on diversifying its customer base, which will support in generation of incremental revenues. The company supplies driveline systems and other components to different automakers and OEMs. In addition, the company is continuously developing customer relationship with auto companies including Renault, Nissan, Tata, Mahindra, Cherry, Brilliance and others.

American Axle will benefit from backlog of new and incremental business, which was launched from 2010 to 2014 amounting $1 billion. 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 other stocks that are performing well in the industry where American Axle operates include STRATTEC Security Corporation (STRT - Snapshot Report) and Visteon Corp. (VC - Snapshot Report). Both the companies carry a Zacks Rank #1 (Strong Buy).

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