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Here's Why Investors Should Hold American Axle (AXL) Stock Now
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American Axle’s (AXL - Free Report) top line is likely to benefit from its driveline solution, portfolio optimization and buyouts. Progress in the electric drive space also bodes well. However, supply-chain bottlenecks, chip crisis and stretched balance sheet are likely to add to woes.
Let’s delve deeper as to why AXL — currently carrying a Zacks Rank #3 (Hold) — warrants a cautious stance right now.
Growth Drivers
American Axle’s innovative driveline solution is bringing new businesses for the firm and supports customer demand for advanced technologies, ensuring business diversification and growth. The company supplies driveline systems and other components to various auto biggies, including General Motors, Jaguar Land Rover, Ford, Harley-Davidson, Volkswagen, Nissan, Honda, Daimler and Stellantis. The company was recently selected as a new axle supplier for the GM Colorado and Canyon vehicles. The Chery Automobile Company also chose AXL to supply power transfer units and rear drive modules for its new SUV program. These frequent business wins augur well for the OEM’s prospects.
The company is focused on making considerable progress across the electric drive space. Further, AXL is determined to make strong headway across the electric drive space. Collaborations with Inovance and REE Automotive bode well for American Axle and are set to fuel electrification revenues. Important electrification launches like the high-performance eDrive promise significant scope for growth. The company’s contract from Geely to supply independent front and rear drive axles for a premium vehicle is likely to aid prospects.
Buyouts and divestitures contribute to portfolio optimization. The acquisition of Metaldyne Performance Group has widened American Axle’s scale, customer base and end markets. Divestment of its U.S iron casting operations has improved its margin profile. Moreover, the buyout of Tekfor — completed during the second quarter of 2022 — is anticipated to generate strong synergies and bolster the firm’s electrification portfolio and add to its strategy of high and quick-return bolt-on acquisitions. The deal has contributed significantly to the firm’s third-quarter revenues and EBITDA.
Despite a significant debt burden, the company’s efforts toward debt reduction and refinancing actions are praiseworthy. It reduced its outstanding debt by $50 million during the third quarter, and in the past 10 months it lowered its total debt by approximately $100 million.
Headwinds
American Axle’s third-quarter sales were significantly impacted by the semiconductor chip shortage. Disruptions are expected to continue well into 2023, which are likely to lead to lost revenues. Commodity cost inflation, manufacturing inefficiencies, labor shortage and elevated freight costs brought on by the current volatile supply chain are adding to the woes. American Axle’s wide exposure to global markets brings concerns about unfavorable forex, which is likely to hurt the company’s earnings and margins. Also, a sharp drop in key metal market indexes had a negative impact on internal inventory levels, which is concerning for the near term.
Technology change calls for substantial amounts of investment and capital spending to evolve the business profile toward new products. Escalating research and development costs may limit margins. Amid high operating expenses and capex, American Axle envisions 2022 FCF at $300 million, down from $300-$350 million estimated earlier.
The firm’s stretched balance sheet remains a cause for concern. In the third quarter, the company’s net long-term debt amounted to $2,974.1 million against cash and cash equivalents of $472.3 million during the same period. Its total debt-to-capital ratio stands at 0.86, higher than its industry's 0.41. A high leverage restricts financial flexibility to tap into growth opportunities.
Discouragingly, American Axle has revised its projections for 2022 downward, which is concerning. It now envisions revenues for 2022 in the range of $5.75-$5.85 billion instead of the previous guidance of $5.75-$5.95 billion. Estimation for adjusted EBITDA is now in the range of $745-$765 million, down from $790-$830 million projected earlier. A lowered outlook dims investors’ confidence.
CarParts has an expected earnings growth rate of 85% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 72.7% upward over the past 30 days.
Allison has an expected earnings growth rate of 26.1% for the current year. The Zacks Consensus Estimate for ALSN’s current-year earnings has been revised 4% upward in the past 30 days.
Genuine Parts has an expected earnings growth rate of 18.1% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 2.5% upward over the past 30 days.
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Here's Why Investors Should Hold American Axle (AXL) Stock Now
American Axle’s (AXL - Free Report) top line is likely to benefit from its driveline solution, portfolio optimization and buyouts. Progress in the electric drive space also bodes well. However, supply-chain bottlenecks, chip crisis and stretched balance sheet are likely to add to woes.
Let’s delve deeper as to why AXL — currently carrying a Zacks Rank #3 (Hold) — warrants a cautious stance right now.
Growth Drivers
American Axle’s innovative driveline solution is bringing new businesses for the firm and supports customer demand for advanced technologies, ensuring business diversification and growth. The company supplies driveline systems and other components to various auto biggies, including General Motors, Jaguar Land Rover, Ford, Harley-Davidson, Volkswagen, Nissan, Honda, Daimler and Stellantis. The company was recently selected as a new axle supplier for the GM Colorado and Canyon vehicles. The Chery Automobile Company also chose AXL to supply power transfer units and rear drive modules for its new SUV program. These frequent business wins augur well for the OEM’s prospects.
The company is focused on making considerable progress across the electric drive space. Further, AXL is determined to make strong headway across the electric drive space. Collaborations with Inovance and REE Automotive bode well for American Axle and are set to fuel electrification revenues. Important electrification launches like the high-performance eDrive promise significant scope for growth. The company’s contract from Geely to supply independent front and rear drive axles for a premium vehicle is likely to aid prospects.
Buyouts and divestitures contribute to portfolio optimization. The acquisition of Metaldyne Performance Group has widened American Axle’s scale, customer base and end markets. Divestment of its U.S iron casting operations has improved its margin profile. Moreover, the buyout of Tekfor — completed during the second quarter of 2022 — is anticipated to generate strong synergies and bolster the firm’s electrification portfolio and add to its strategy of high and quick-return bolt-on acquisitions. The deal has contributed significantly to the firm’s third-quarter revenues and EBITDA.
Despite a significant debt burden, the company’s efforts toward debt reduction and refinancing actions are praiseworthy. It reduced its outstanding debt by $50 million during the third quarter, and in the past 10 months it lowered its total debt by approximately $100 million.
Headwinds
American Axle’s third-quarter sales were significantly impacted by the semiconductor chip shortage. Disruptions are expected to continue well into 2023, which are likely to lead to lost revenues. Commodity cost inflation, manufacturing inefficiencies, labor shortage and elevated freight costs brought on by the current volatile supply chain are adding to the woes. American Axle’s wide exposure to global markets brings concerns about unfavorable forex, which is likely to hurt the company’s earnings and margins. Also, a sharp drop in key metal market indexes had a negative impact on internal inventory levels, which is concerning for the near term.
Technology change calls for substantial amounts of investment and capital spending to evolve the business profile toward new products. Escalating research and development costs may limit margins. Amid high operating expenses and capex, American Axle envisions 2022 FCF at $300 million, down from $300-$350 million estimated earlier.
The firm’s stretched balance sheet remains a cause for concern. In the third quarter, the company’s net long-term debt amounted to $2,974.1 million against cash and cash equivalents of $472.3 million during the same period. Its total debt-to-capital ratio stands at 0.86, higher than its industry's 0.41. A high leverage restricts financial flexibility to tap into growth opportunities.
Discouragingly, American Axle has revised its projections for 2022 downward, which is concerning. It now envisions revenues for 2022 in the range of $5.75-$5.85 billion instead of the previous guidance of $5.75-$5.95 billion. Estimation for adjusted EBITDA is now in the range of $745-$765 million, down from $790-$830 million projected earlier. A lowered outlook dims investors’ confidence.
Key Picks
Here are some better-ranked players in the auto space –CarParts.com (PRTS - Free Report) , sporting a Zacks Rank #1 (Strong Buy), and Allison Transmission Holdings (ALSN - Free Report) and Genuine Parts Company (GPC - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
CarParts has an expected earnings growth rate of 85% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 72.7% upward over the past 30 days.
Allison has an expected earnings growth rate of 26.1% for the current year. The Zacks Consensus Estimate for ALSN’s current-year earnings has been revised 4% upward in the past 30 days.
Genuine Parts has an expected earnings growth rate of 18.1% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised 2.5% upward over the past 30 days.