GM - American Axle & Manufacturing: Fighting An Uphill Battle

2023-08-04 14:57:47 ET

Summary

• American Axle & Manufacturing Holdings, Inc. has struggled to deliver on promises after a $3.3 billion merger in 2016.
• The company's lack of performance is due to underrepresentation in the electrification sector.
• Facing long-term positioning challenges, it is hard to get very upbeat on the prospects for the business and its shares.

In April 2022, I believed that American Axle & Manufacturing Holdings, Inc. ( AXL ) was getting electrified after the business had seen a few tougher years after its mega deal back in 2016. Secular headwinds to the business mean that the deal has not delivered on its promises.

Valuation remained non-demanding, for good reasons: notably, the electrification of the industry which marked a huge transition, as well as a large debt overhang, leaving American Axle with a lot of work to do.

Given the continued disappointments, I failed to have conviction on the business, but concluded to keep track of the developments.

A Recap

American Axle announced a huge deal for Metaldyne back in 2016. In fact, it closed on a huge $3.3 billion merger. At the time, American Axle generated $3.9 billion in sales on which the company posted EBITDA of $571 million, with the company awarded a $2.3 billion enterprise valuation.

In that light, the $3.3 billion deal for MPG was huge, granting the company expertise in powertrain components, while reducing the reliance on General Motors ( GM ) as its key customer to still an elevated >40%. MPG added some $3 billion in sales and $528 million in EBITDA to the business, yet the deal was set to to provide greater diversification and deliver on an anticipated $100 million in costs synergies.

The goal was to create a $7 billion business with over a billion dollars in EBITDA, operating with a 3-4 times leverage ratios, as shares of American Axle fell from $17 to $14 overnight upon the deal announcement. This came as investors likely feared the added leverage, all while pro forma earnings were seen as high as $3 per share. Given the backdrop, I considered shares to be more a call option, rather than a serious investment, with both risks and potential seen toward the downside and upside.

In the five years since the deal announcement, shares of American Axle have lost another 50% of their value, trading at $7 and change in April 2022. This came as the company has been lagging in a huge way as sales fell to $5.2 billion in 2021, coming in far below the 2016 pro forma numbers of around $7 billion. This lack of performance is (largely) the result of underrepresentation to electrification.

Despite falling sales, the company posted an adjusted EBITDA number of $833 million, translating into solid margins, although the D&A component here is pretty heavy with the company posting adjusted earnings of $0.93 per share, and GAAP earnings of of just five cents.

Such earnings power (even adjusted) marks just a fraction of the promises at the time of the deal. While it was good to see that net debt has come down (in absolute terms) to $2.5 billion, relative leverage ratios have come down in a less impressive manner with EBITDA under pressure.

After the 2021 numbers were pretty soft (on a historical basis), the company guided for largely flattish sales between $5.6-$5.9 billion in 2022 and EBITDA seen at $800-$875 million.

In April of last year, the company announced a EUR 125 million acquisition of German-based Tekfor Group to add automotive fasteners and metal formed components in a deal adding EUR 285 million in sales and likely greater exposure to electrification models, a comforting sign.

Despite the interesting deal, investing in the long run depends largely on the strength of the business, and that is not the case with American Axle, at least not to my belief.

What Happened?

In the period of a little over a year since last looking at the company, shares of American Axle have been trading stable, actually they have moved up a bit. Shares have traded in a $7-12 range, now trading at $9 and change, marking modest gains since April 2022.

Part of the resilient share price performance was due to various occasions in the media that the company saw speculation of being involved in a sale, which the company subsequently denied.

In February of this year, it became apparent that the company delivered on its promises with full year sales posted at $5.80 billion, as GAAP operating profits rose in a minimal fashion to $244 million. After accounting for steep interest expenses of $174 million, net earnings came in at $64 million, for earnings of $0.53 per share.

Note that there were many moving parts to this earnings number as the company posted adjusted earnings of $0.60 per share, down from $0.93 per share in the year before. The GAAP numbers included some restructuring costs, debt refinancing costs and losses on equity securities, offset by Malvern fire insurance recoveries. Based on an adjusted EBITDA number of $747 million, leverage remains elevated as net debt still came in at just over $2.4 billion, as that number even excludes over $600 million in post retirement benefits and related liabilities.

For 2023, American Axle guided for a modest increase in sales to $5.95 to $6.25 billion, with adjusted EBITDA seen between $725 and $800 million, indicating largely stagnant results as reducing leverage is badly needed in order to lower leverage, to thereby reduce interest expenses.

First quarter results were a bit challenging, with sales up 4% to $1.49 billion which was the good news as GAAP operating profits were essentially cut in half to $36 million. Due to rising interest expenses, the company posted a GAAP loss of $5 million, equal to four cents per share, with adjusted losses reported at a penny per share, as the company maintained the full year guidance.

In August, the company reported second quarter sales of $1.57 billion, up 8% on the year before, with GAAP operating profits coming in flattish at $58 million. Contrary to the first quarter, a GAAP profit of $8 million was reported, equal to seven cents per share, with adjusted earnings reported at $0.12 per share. Net debt fell a little bit to $2.36 billion, as the company maintained the full year guidance, for a 3.0-3.2 times leverage ratio.

What Now?

While the second quarter earnings report seems to be a bit more upbeat, I am still cautious here. The business continues to see real long-term struggles, and it still is a long way from reducing leverage in a huge way, as the traditional leverage ratios are not indicative, with the business being D&A heavy.

Given this observation, I am still cautious on American Axle here, still not being impressed with the business and its upcoming challenges, with earnings power having fallen a great deal, eroding the fundamental support to the business case, and thus any appeal as well.

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