DAN - Dana: Eyes On Beat-And-Raise Quarter And New Contract Award

2023-07-31 16:04:55 ET

Summary

• Q2 2023 was a beat-and-raise quarter for Dana Incorporated; Dana's actual second quarter EPS was twice as high what the analysts expected, and the company revised its full-year guidance higher.
• The new contract award for an OEM's EV program has positive read-throughs for Dana's long-term margin expansion potential.
• I assign a Buy rating to Dana Incorporated stock, considering both its near-term prospects and long-term outlook.

Elevator Pitch

I rate Dana Incorporated ( DAN ) stock as a Buy. DAN's short-term outlook is favorable, taking into account the company's recent beat-and-raise quarter for Q2 2023 . Dana Incorporated has room to expand its profit margins in tandem with growing content per vehicle for EV programs in the long term; I find the company's recent new Rigid Beam e-Axle award encouraging. The above-mentioned factors support my Buy rating for DAN.

Company Description

DAN calls itself "a world leader in providing power-conveyance and energy-management solutions for vehicles and machinery" whose offerings include "axles, driveshafts, transmissions, sealing and thermal products" and other "electrifications products" in its fiscal 2022 10-K filing .

As indicated in its Q2 2023 earnings presentation slides , Dana Incorporated derived 38%, 31%, 19%, and 12% of its revenue from its light vehicle, off-highway, commercial vehicle, and power technologies segments, respectively for 1H 2023. The off-highway business is the key operating earnings contributor for DAN, as it accounted for 55% of the company's 1H 2023 EBITDA. The light vehicle, commercial vehicle, and power technologies business segments contributed the remaining 26%, 10%, and 9% of Dana Incorporated's EBITDA, respectively in the first half of this year.

Dana Incorporated Sales Breakdown By Client Across Its Business Segments

The North America, Europe, Asia Pacific, and South America markets represented 45%, 35%, 14%, and 6% of DAN's 1H 2023 top line, respectively, as revealed in its Q2 2023 10-Q filing .

Beat And Raise For Q2 2023

Dana Incorporated's second quarter bottom line turned out to be above Wall Street's expectations, and the company revised its full-year financial guidance upwards

Revenue for DAN expanded by +6.3% YoY and +3.9% QoQ to $2,748 million in the second quarter of this year. Dana Incorporated's actual Q2 sales met the sell-side expectations, as the analysts had earlier forecasted a quarterly revenue of $2.75 billion for DAN. Dana Incorporated's non-GAAP adjusted earnings per share or EPS rose significantly from $0.08 in Q2 2022 and $0.25 in Q1 2023 to $0.37 for Q2 2023. Before the company announced its Q2 2023 results on July 28, the sell-side was expecting DAN to report a much lower bottom line of $0.18 per share .

Encouraged by its excellent financial performance in the recent quarter, Dana Incorporated decided to raise its FY 2023 management guidance. The mid-point of DAN's FY 2023 revenue guidance was lifted from $10.6 billion earlier in late-April to $10.7 billion now. Also, the company's expected normalized EPS for the current fiscal year was increased from $0.50 previously to $0.85 currently as per the mid-point of its guidance. The updated guidance implies that the management sees DAN's top line and bottom line growing by +5.4% and +29.7%, respectively this year.

Moving ahead, Dana Incorporated is of the opinion that the company's good financial performance in Q2 2023 can be sustained for the second half of the year as evidenced by its improved management guidance. Specifically, DAN stressed at its Q2 2023 earnings briefing that "improving operational efficiencies, slightly lower EV spending and a beneficial product and market mix" are expected to be key tailwinds for the company for the rest of 2023. Dana Incorporated continues to place a strong emphasis on optimizing costs and capital expenditures, while it expects its high-margin off-highway business (most profitable of the four business segments) to contribute a larger proportion of sales in the current year. These are the major factors driving DAN's favorable FY 2023 outlook.

New Contract Award Has Positive Read-Throughs For DAN

Dana Incorporated revealed at the company's second quarter results call that it "will be supplying our Rigid Beam e-Axle for a highly anticipated light and medium duty truck program." Full details of the new contract award will only be available at a later date, but DAN referred to this as a "major EV program award" with "a major North America OEM."

Growing electric vehicle or EV penetration will be a major tailwind for DAN in the long run in terms of the substantial increase in content per vehicle.

At the Deutsche Bank ( DB ) Global Auto Industry Conference in mid-June, DAN highlighted that its content per vehicle could potentially rise by three to four times with the supply of products like the Rigid Beam e-Axle for an EV program as compared to a traditional ICE (Internal Combustion Engine) program. It is also worth noting EVs as a proportion of Dana Incorporated's order backlog increased from 50% one year ago to approximately 65% now.

Assuming that DAN does grow its sales contribution from EVs to a quarter of its top line by 2030 as per its targets, it will be realistic to expect that Dana Incorporated will be able to generate higher profit margins in the long run on the back of rising content per vehicle.

The recently announced new contract award relating to the Rigid Beam e-Axle suggests that Dana Incorporated is gaining traction in securing new contract awards for EV programs.

Concluding Thoughts

Dana Incorporated's current undemanding mid-single digit or 6.2 times (source: S&P Capital IQ ) consensus forward next twelve months' EV/EBITDA multiple has not fully priced in DAN's positive near-term financial outlook and its profitability improvement potential for the long run. In a nutshell, DAN's shares are mispriced, which warrants a Buy rating.

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