Dana Incorporated: A Solid Play For Value Investors
- Dana Incorporated is showing signs of a strong turnaround following the painful 2020 fiscal year.
- Cash flows are robust and the company's prospects, for the foreseeable future, should be positive.
- Add in the fact that shares appear cheap and it should make a great prospect for value-oriented investors.
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In the modern era, vehicles and other forms of machinery have a significant impact on our daily lives and on the functioning of our economies. Without them, we would be living much the way that our ancestors did for the past couple hundred thousand years. So naturally, it stands to reason that there would be a large and vibrant market aimed at providing various products and services for these vehicles and other types of machinery. One interesting prospect in this space is a firm called Dana Incorporated (NYSE:DAN). Prior to the COVID-19 pandemic, the company exhibited attractive growth on its top line and when it came to cash flow. 2020 proved to be a bit painful for the enterprise, but growth has resumed through the 2021 fiscal year. On top of this, shares of the business look to be attractively priced, even if we anticipate a return back to pre-pandemic levels. So for these reasons, it should make for a great prospect for long term, value oriented investors.
Taking Dana for a test drive
Dana operates today as a provider of power conveyance and energy management solutions for vehicles and other types of machinery. In particular, the company services light vehicles, commercial vehicles, and various off highway equipment. Not only does it provide the products necessary to enable the propulsion of conventional vehicles, it also provides the same for hybrid and electric powered vehicles. On top of all of this, the company also services the stationary industrial market in some ways. It does all of this through the 141 large facilities that it operates across the world, spread between 33 different countries in all.
At this time, Dana operates in four different segments. The largest of these is called Light Vehicle. According to management, products sold under this segment includes things like axles, transmissions, drivetrain components, and more. It services many of the major automobile companies through this segment, working to provide products for their light trucks, sport utility vehicles, passenger cars, and more. According to management, this particular segment, in the company's 2020 fiscal year, accounted for 42.8% of the firm's overall sales. The next segment the warrants our attention is the Commercial Vehicle segment. Through this segment, the company provides many of the same products as it does for the Light Vehicle segment, only with a change in focus to medium duty trucks, heavy duty trucks, buses, and various specialty vehicles. This particular segment was responsible for 16.6% of the company's overall sales in 2020.
The second largest segment that Dana operates today is called Off-Highway. As its name suggests, the Off-Highway segment focuses on large machinery like construction equipment, agricultural equipment, mining and forestry equipment, material handling equipment, and more. It, too, focuses on many of the same products that the other aforementioned segments sell. Based on the data provided, this segment made up 27.7% of the company's sales last year. The last key segment that we should pay attention to is the Power Technologies segment. Through this segment, the company provides products like gaskets, cover modules, heat Shields, engine sealing systems, cooling technologies, heat transfer products, and more. These products are for the light vehicle and the heavy and medium vehicle and off-highway markets. Management said that this segment accounted for 12.9% of revenue in 2020.
In the years leading up to the COVID-19 pandemic, Dana was successful in growing its operation at a nice clip. Sales increased from $5.83 billion in 2016 to $8.62 billion in 2019. But then, in 2020, revenue dropped by 17.6%, falling to just $7.11 billion for the year. Fortunately for investors, this downturn was short term in nature. For the first nine months of the company's 2021 fiscal year, sales came in at $6.67 billion. That is 33.5% higher than the roughly $5 billion the company generated the same time one year earlier. Although performance improvements, acquisitions, and foreign currency fluctuations had a positive impact on the company's top line, the bulk of the increase in revenue came from a mixture of higher sales volume and favorable product mix. For the 2021 fiscal year, management expects sales to come in at between $8.8 billion and $9 billion. At the midpoint, this would represent growth of 25.2% relative to the 2020 figures and growth of 3.2% relative to 2019.
When it comes to the bottom line, we can see that it has been rather volatile in recent years. This is demonstrated in the chart above. However, more consistent has been operating cash flow. Between 2016 and 2019, operating cash flow expanded from $384 million to $637 million. But then, in 2020, operating cash flow plunged to $386 million. A similar path can be seen by looking at EBITDA. This figure expanded from $660 million in 2016 to $1.02 billion in 2019. But then, in 2020, it came in at $593 million.
For the 2021 fiscal year, volatility has been the name of the game. The company went from generating a net loss of $71 million in the first nine months of 2020 to generating a profit of $172 million. Operating cash flow, however, dropped, falling from $195 million to $19 million. But if you adjust for changes in working capital, it would have risen from $245 million to $520 million. Over the same period of time, EBITDA ticked up from $401 million to $677 million. Management has provided some guidance for the current fiscal year. At present, they anticipate EBITDA of between $815 million and $875 million, with a midpoint of $845 million. Earnings per share guidance implies net profits for the year of $266.8 million, while operating cash flow looks set to come in at about $465 million.
Using this data, we can now attempt to price the company. On a price to earnings basis, for instance, the firm is trading at a multiple of 12.3. This is down from the 14.6 reading that we get if we use the data from 2019. The price to operating cashflow multiple should be 7.4, up from the 5.2 from 2019. And finally, we end up with an EV to EBITDA multiple of 6.5. This compares to the 5.4 if we used the 2019 figures. To put this all in perspective, I decided to compare the company to the five highest rated of its peers as determined by Seeking Alpha’s Quant platform. On a price to earnings basis, these companies ranged from a low of 9 to a high of 27.2. Whether we use the 2019 or 2021 figures, Dana is cheaper than three out of the five firms. I then did the same thing using the price to operating cash flow approach, ending up with a range of 9.6 to 126.6. In this case, both scenarios resulted in our prospect being the cheapest of the group. And finally, I performed the same analysis using the EV to EBITDA approach, giving me a range of 1.8 to 18.3. And in both scenarios, only one of the five firms was cheaper than our target.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|LCI Industries (LCII)||15.6||126.6||11.0|
|Patrick Industries (PATK)||9.3||9.6||7.0|
|Dorman Products (DORM)||27.2||43.3||18.3|
|Standard Motor Products (SMP)||14.6||12.1||7.7|
|Garrett Motion (GTX)||9.0||N/A||1.8|
All things considered, Dana appears to be a quality enterprise that, like many others, was temporarily negatively affected by the COVID-19 pandemic. Since then, things have been looking up and it is likely that the future for the enterprise is attractive. Throw in the fact that shares of the business look cheap on both a relative basis and on an absolute basis, and I cannot help but to think that it could make for a good opportunity today for value investors.
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This article was written by
Daniel is an avid and active professional investor. He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.
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