American Axle & Manufacturing Holdings Inc. (AXL), better known as AAM to many, is a U.S.-based automotive parts manufacturer and the leading Tier-One global supplier of automotive drivetrain systems, axles and chassis as well as related components for SUVs, light trucks, passenger cars, commercial vehicles and crossover vehicles. The company also has manufacturing facilities in several other countries as well including Japan, India, Mexico, Brazil, Germany and the U.K. The firm employs approximately 7,800 people.
American Axle's Stock Movement
According to a report by MarketIntelligenceCenter.com, American Axle's shares stood at $18.48 at close of business on June 14, 2013. The company's stock has been bullish of late. The stock hit its 52-week high of $18.72 and 52-week low of $9.11 in 2012. American Axle's stock has of late been showing strong support around the $17.45 mark and considerable resistance at $18.61.The firm's breakeven stock price is $15.80. Investors looking for a hedged play on American Axle's stock are advised to sell if the share price tumbles south of the October 13, 2012 mark of $17.00. The $17.00 covered call runs for a duration of 129 days and provides investors with a 12.22% downside protection as well as a 7.59% assigned return rate and a 21.49% annualized return rate (for comparison purposes).
American Axle's Financials
American Axle reported Q1 2013 earnings of $18.6 million on May 3, 2013. This translates to 23 cents per share EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) and represents a jaw-dropping 62.3% EPS drop compared with Q1 2012 EPS. Revenues in Q1 2013 stood at $751.5 million. Adjusted EPS fell a massive 83.61% from $0.61 in Q1 2012, to just $0.10 in Q1 2013. The drop is largely attributed to the adverse effects of the General Motors labor strike in Thailand.
Actual Performance versus Wall Street Expectations
The mean Wall Street analyst's predictions for American Axle in Q1 2013 was $0.16. At an adjusted EPS of just $0.10, the firm fell short of Wall Street predictions. American Axle, however, marginally outperformed Wall Street's prediction for revenues in the same period by turning out a respectable $751.5 million in Q1 2013 compared with the former's prediction of $750.1 million.
Compared with the previous quarter (Q4 2012), revenues grew by 2.57% from $736.7 million. Despite stacking up badly against Q1 2012 adjusted EPS, the adjusted EPS for Q1 2013 is an improvement over last quarter's dismal $-0.02.
You can get a glimpse of American Axle's performance in the past few years below:
American Axle and Manufacturing Holdings Inc. Financial Metrics
Return on Equity
Return on Assets
Amount in Millions of U.S. Dollars
Source: American Axle and Manufacturing Holdings Inc.
Difficult Trading Environment
The table above will help you better understand where American Axle is coming from.The period spanning 2008 to 2010 represented the most difficult period the company has had to face in recent times. Most of its manufacturing facilities were left idle in 2008 after a massive strike by the company's workers.This led to the company running in the red and returned a 48% loss on revenues of about $2 billion. The following year was not much better either. The company's biggest company, General Motors, declared bankruptcy and this precipitated a series of events that resulted in investor panic that eventually saw the company's share price take a nosedive to trade at less than $1.
Falling gas prices have improved matters somewhat for the company by encouraging people to purchase more light trucks and SUVs. 2010 portended good tidings for American Axle after GM agreed to give the company more favorable terms including faster payments and a $100 million cash-cushion that ensured the company avoided getting itself entangled in a bottomless pool of never-ending debt. American Axle is GM's principal supplier of rear-wheel drive vehicles.
American Axle is the newest entrant and the smallest player in the cutthroat automobile industry. It faces daunting competition from much bigger players such as Meritor, Borg Warner and Dana Automotive. Despite the challenges of being a small player in a highly-competitive industry, American Axle is holding its own quite well. It currently has the highest EBITDA margins and an enviable cash conversion cycle compared with its competitors.
Far Better-than-Average Cash Conversion Cycle
The cash conversion cycle [CCC] can be viewed as the time taken by a company to get paid by its customers compared with the time it takes before it pays its suppliers. American Axle recorded a -2.51 CCC compared with 31.32 for Meritor, 44.81 for Dana and 36.67 for Borg Warner. Negative CCCs are extremey rare in the autmobile parts manufacturing industry. American Axle and Manufacturing Holdings Inc. has the best CCC in the industry - a negative CCC - meaning it collects money from its suppliers (in this case GM) before paying out its customers. GM takes only 10 days to pay American Axle after delivery of parts compared with the industry average of 45 days.What this means is that American Axle's free cash flow is not threatened - a critical factor for a company that is still recovering from a trubulent trading period.
There is no denying that American Axle has faced tough times in recent years.The company is currenty undertaking strong restructuring measures to fortify its position in the automobile parts manufactuing market segment. The management of American Axle is focused on diversifying the company's customer base in a bid to support the generation of diversified incremental revenues for the company.The company is a highly-reputed supplier of driveline systems as well as related components to various automakers and OEMs. It has strong relationships with automakers such as Nissan, Renault, Mahindra, Tata, Cherry and Brilliance amongst other large automakers.
The focus on diversifying its product offerings base is a business expansion strategy that was launched in 2010 and the momentum is expected to continue until 2014, when the company expects to have grown its segment of incremental revenues by $41 billion. The company is also currently undertaking expansion activities in Asia to harness the growing demand for automobiles in the region. Additionally, it plans to expand and grow its manufacturing footprint in several countries such as China, Brazil, Mexico, India, Thailand and Poland.
Despite these measures, Wall Street financial analysts have a rather pessimistic outlook for the company's financial in the remaining three quarters of 2013. Consequently, EPS for Q2 2013 has been adjusted from a high of $0.50 to the current $0.32. Profit for Q2 has also been revised downwards from $1.92 to $1.69.
In its ambitious bid to expand manufacturing activity and strengthen its export base, American Axle will have to contend with the growing pricing pressure from major OEMs. The company will also have to come up with a formula to insulate its manufacturing platforms that are exposed to maximum production cuts. A good case in point is the rapidly declining output and sales levels of SUVs and RWD light trucks in North America. The two categories make up a substantial proportion of American Axle's revenues.
American Axle's stock, however, is one bright spot in the company's faltering performance and continues to be bullish both in the short term and mid-long term. Go long on this stock for now.