Dana Starting To Deliver On Its EV Opportunities, And The Street Has Noticed

Summary

• Dana has announced multiple commercial vehicle EV awards, including projects with Daimler and Oshkosh that will launch this year.
• The auto chip shortage is unlikely to hurt Dana much, as OEMs are prioritizing chip supplies toward higher-margin pickups and SUVs, which is Dana's passenger vehicle focus.
• Stronger awards (particularly in content per vehicle) lead me to more robust revenue growth assumptions, and Dana's opportunity in commercial/off-road is particularly attractive (less risk of OEM insourcing).
• Dana shares still have upside toward $30 and high-single-digit long-term total return potential.

With the company finally getting credit for its leverage to EV opportunities in passenger vehicles, commercial trucks, and off-road machinery, Dana (NYSE:DAN) has done quite well since my last update, rising about 65%. With a growing backlog and outperform on content-per-vehicle growth in EV projects, I believe Dana’s story is getting stronger.

Even after a strong run I still like these shares. While I might lean more strongly toward BorgWarner (BWA) or Valeo (OTCPK:VLEEY) just on the basis of relative valuation, I like Dana’s broad vehicle exposure, particularly as there is less risk of OEM insourcing electric powertrains on the CV/off-highway side. Moreover, pickups and SUVs remain high-priority profit centers for auto OEMs, and a strong market for Dana.

Given all of the above, I think Dana can trade toward $30 over the near term and still offers a high single-digit long-term total annualized potential return.

EV Investments Bearing Fruit

Like BorgWarner, Dana has made a series of acquisitions to develop its hybrid/EV business opportunity, adding technology in high-voltage components (inverters and controllers), drives/axles, low-voltage components, and BEV controls and software, while also reinvesting in its own core assets (like the Spicer axles) to develop a broad suite of solutions for passenger vehicle, commercial vehicle (or CV), and off-highway machinery customers.

And those investments are starting to pay off.

While the recently-released ’21-’23 backlog was flat with the prior release, the 3-year backlog is now 50% EV, with an overall content per vehicle of more than double the company’s experience with internal combustion engine (or ICE) vehicle projects; in fact, some of the CV wins are coming in at 4x content.

In addition to winning the hybrid driveline for the Jeep Wrangler 4xe, Dana secured a win for its full e-Propulsion offering on a heavy duty truck from a global manufacturer launching in 2024. Additionally there are three projects that will be ramping in 2021 – a battery cold plate for the GMC Hummer EV (demonstrating that while General Motors (GM) is insourcing EV powertrans, they’re not insourcing everything), an e-Hub drive for Oshkosh’s (OSK) electric scissor lift, and a full e-Propulsion win at Daimler (OTCPK:DMLRY) for a medium-duty truck launching in Q3, including the power cradle, power pack, and e-drive.

All told, Dana is likely looking at generating at least 5% of its 2023 revenue (which management is targeting at $10B) from EV projects, and the actual number could be higher. As more EV programs launch, Dana will not only see the revenue benefit but also margin benefits as it earns some rewards on its R&D investments in the EV space.

Relative Less Near-Term Risk

Relative to many other parts suppliers, I see Dana as having less near-term risk.

First, while the semiconductor shortage is impacting the entire auto industry, auto OEMs are reserving what chips they can get for their highest-margin products, typically pickups and SUVs, and that’s where Dana focuses in the passenger vehicle space. Consequently, I don’t see as much disruption to Dana’s PV business in 2021.

Second, Dana’s more balanced mix between passenger vehicles and CV/off-highway vehicles gives the company good leverage to a strong rebound in those markets. Commercial vehicle volumes are going to surge this year as companies fill orders, and off-highway categories like agriculture and mining are looking quite a bit stronger at this point in the cycle, with strong grain and metal prices and overaged fleets driving a replacement cycle.

The Outlook

I was bullish on Dana’s EV opportunity to begin with, but Dana is getting better awards (in terms of content) than I expected, and the launch programs for BEV CVs and off-highway machinery appear to be coming on faster than I previously expected. So in addition to pushing the weak 2020 out of my model, those drivers are pushing my revenue expectations higher.

I’m now looking for long-term revenue growth around 3%; OEM insourcing and competition from other suppliers will remain an ongoing risk, but I believe Dana will be a relative winner over the long term.

I’m also expecting improving profitability, with EBITDA margins climbing from around 8% last year (and close to 12% pre-pandemic) back to 12% in 2023 and possibly in 2022. Over the longer term, I expect FCF margins to improve to the mid-single-digits, driving high single-digit FCF growth.

The Bottom Line

Between discounted cash flow and margin-driven EV/revenue, I believe Dana can trade toward $30 over the near term, with a high single-digit long-term annualized total return opportunity. It will be important for the company to continue logging EV wins and executing on margins, but I believe Dana is already showing that it has assembled an attractive EV technology portfolio, and I like the diversified leverage across passenger vehicle, commercial vehicle, and off-road vehicle electrification.

Analyst’s Disclosure: I am/we are long BWA, FR.FR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.