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American Axle & Manufacturing (NYSE:AXL) could be a great way to bet on a resurgent General Motors (NYSE:GM). This company used to be a subsidiary of General Motors and it remains a major supplier to the company today. This makes it a "backdoor" way to participate in the long-term potential of General Motors at what appears to be a significantly lower valuation. Investing in American Axle could also eliminate the potential risk facing GM shareholders when the U.S. Government decides to sell the very significant stake it took in the company as a part of the financial crisis bailout. U.S. Government ownership can weigh on a stock and even cause it to drop when the government announces it will sell shares. The U.S. Government owns nearly 27% of General Motors and the eventual sale of billions of shares could weigh heavily on the stock. Investors recently watched shares of American International Group (NYSE:AIG) drop from around $37 to below $33, in part due to the announcement that the government would sell shares. Aside from not having the same government ownership risks of GM, it offers a cheaper valuation. Here is a closer look at the company and comparison of the valuations:

American Axle is one of the world's largest makers of powertrains, chassis modules, driveline and drivetrain systems, and other related components. It designs products that are used in passenger vehicles, four-wheel drive SUV's, pickups, and commercial trucks. While General Motors is one of American Axle's top customers, it is diversifying its customer base and recently signed a new deal to manufacture and assemble transfer cases for Jaguar Land Rover. This is good to see because heavy dependence on General Motors is a risk to consider and the company needs to moving to diversifying its customer base.

General Motors shares have been trending higher as car sales remain strong, particularly in the United States. That has pushed GM shares from lows of about $19 in July to nearly $26 just recently. This jump in price now gives GM shares a PE ratio of about 7 times, while American Axle shares trade at just about 5 times earnings for 2013. When the global economy improves, both of these companies could see multiple expansion, and American Axle appears to have the most upside potential. A difference between a PE multiple of 5 and a PE multiple of 7 is about 40%. Analysts seem to think the market has undervalued American Axle shares. In early October, RBC Capital Markets upgraded the shares of American Axle to an outperform rating and set a $16 price target. That would give current investors a gain of nearly 50%.

Key Data Points For American Axle From Yahoo Finance:

  • Current Share Price: $10.42
  • 52-Week Range: $7.50 to $13.08
  • Dividend: none
  • 2012 Earnings Estimate: $1.51 per share
  • 2013 Earnings Estimate: $2 per share
  • P/E Ratio: about 5 times 2013 earnings estimates

Key Data Points For General Motors From Yahoo Finance:

  • Current Share Price: $25.43
  • 52-Week Range: $18.72 to $27.68
  • Dividend: none
  • 2012 Earnings Estimate: $3.17 per share
  • 2013 Earnings Estimate: $3.76 per share
  • PE Ratio: about 7 times 2013 earnings estimates

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Source: Analysts See A 50% Gain Coming For This General Motors Supplier