American Axle & Manufacturing Holdings' AXL shares have declined 27.6% on a year-to-date basis compared with the industry’s decline of 3.8%. The coronavirus pandemic has crippled the auto industry, and put pressure on this Detroit-based global automotive supplier’s earnings as well as sales.
After posting a string of quarterly earnings for several years, American Axle swung to loss in the last reported quarter as revenues slid around 70% year over year. Notably, the COVID-19 pandemic impacted second-quarter 2020 sales by nearly $947 million. For the quarter, the company posted negative adjusted free cash flow (FCF) of $161.8 million versus positive adjusted FCF of $119.3 million in the year-earlier period. Its elevated leverage of around 90% plays a major spoilsport and restricts the firm’s financial flexibility to tap on growth opportunities.
Nonetheless, it’s not all gloom and doom. Let’s take a look at the brighter side of the story.
As the industry is emerging from coronavirus-led shutdowns, American Axle continues to optimize and right-size the business to operate at a seasonally adjusted annual rate (SAAR) of sales of 14 million units. Importantly, with improving fleet sales and persistent strength in light pickups, SAAR of sales for August was more than 15 million units, higher than management’s expectation. The company’s heavy exposure to North America’s SUV and pickup market sets the stage for recovery in second-half 2020. As such, things are looking up for the firm, unless a second wave of coronavirus triggers another round of shutdowns.
Further, operations in China have been stabilized and the business in Europe is ramping up gradually. Importantly, American Axle expects to generate profits and FCF in the second half of the year. The company’s cost-containment efforts are expected to pay off. It targets to achieve $60 million cost reduction this year.
Further, the Metaldyne Performance Group buyout has widened American Axle’s operating scale, customer base and end markets. Further, MPG’s expertise in complex, highly-engineered powertrain components will aid the company to offer enhanced products to customers, in addition to providing commercial and financial synergies.
American Axle’s progress on electrification efforts bodes well. The firm recently launched its first EV program in China on the Baojun E300 Plus. With this, American Axle currently has three EV programs in its kitty. As Baojun is a China-based automobile marque owned by a joint venture of the U.S. auto giant General Motors GM and China’s leading automaker SAIC Motor, it represents American Axle’s first win on a value brand.
Markedly, American Axle was named GM Supplier of the Year for the fourth year in a row in 2020. In addition to its long standing relationship with General Motors — which is the firm’s largest customer — and Fiat Chrysler (FCAU - Free Report) , the company supplies driveline systems and other components to Jaguar Land Rover, Ford, Harley-Davidson, Volkswagen, Nissan, Honda, Mercedes-Benz, Isuzu and various other OEMs. With its latest innovative driveline solution, American Axle is expected to notch more contracts.
While American Axle is facing strong competition from firms including BorgWarner (BWA - Free Report) and Dana Incorporated, it is doing a fairly good job in adapting to the changing business dynamics and progressing toward the electric drivetrain technology. The e-Drive offerings support customer demand for advanced technologies, and are likely to result in greater business diversification and solid growth.
Considering the above-mentioned factors, it is recommended to retain American Axle in your portfolio for the time being. The Zacks Rank #3 (Hold) stock has an expected EPS growth rate of 8.1% for the next three-five years. The Zacks Consensus Estimate for 2021 earnings suggests year-over-year growth of 110%. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
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