STLA - Dana: Too Much Uncertainty (Rating Downgrade)

2023-10-10 11:51:32 ET

Summary

• There is significant uncertainty regarding the length and scope of the ongoing UAW strike.
• Dana Incorporated's consensus numbers are likely to be revised downwards in a meaningful way if there are unfavorable developments associated with the UAW strike in the future.
• I downgrade the rating for Dana Incorporated to a Hold, as I consider the company's fair valuation and the uncertain outlook.

Elevator Pitch

My investment rating for Dana Incorporated (DAN) shares is a Hold.

I wrote about DAN's Q2 2023 financial performance and the company's latest contract win in my July 31, 2023, initiation article . With this current update, my focus is on the UAW (United Auto Workers) strike and its impact on Dana Incorporated.

I have decided to revise my rating for Dana Incorporated from a Buy earlier to a Hold now. In my opinion, there is too much uncertainty regarding DAN's business outlook for 2H 2023 or even FY 2024, as there is nothing to indicate that the UAW strike will end soon. The consensus financial projections for Dana Incorporated haven't incorporated the potential negative effects of an extended strike, and I deem DAN's current valuations to be fair.

UAW Strike Is In The Limelight

Seeking Alpha News reported on October 4, 2023, that General Motors (GM) "is potentially digging in for a prolonged (UAW) strike" after "it secured a $6B revolving credit facility with JPMorgan Chase (JPM)." It is fair to say that no one, including the companies involved like GM, has an idea of when the UAW strike will come to an end.

In the case of Dana Incorporated, the company did emphasize at the J.P. Morgan Auto Conference on August 10 this year that "a good chunk of our business is still going to operate as it is" due to its diversified operations. DAN noted at the JPM investor event that it is "pretty well split between 50% light, 50% heavy-duty." The company also mentioned that "only a (certain) percentage of that (DAN's businesses) is going to be in the United States of America."

Dana Incorporated disclosed in its 10-K filing that Ford (F) and Stellantis N.V. (STLA), two of the key OEMs involved in the UAW strike, accounted for 19% and 11% of its revenue, respectively, last year. On the flip side, DAN generated 54% of its FY 2022 top line from its businesses outside the US, as indicated in its 10-K filing.

While having a diversified mix is helpful for DAN, the scope of the UAW strike appears to be widening. The UAW strike is perceived to have the biggest hit on the light duty vehicle segment, as the members of UAW "produce nearly half of the light vehicles" for the U.S. market as mentioned in a September 9, 2023, Washington Post news article .

However, it is noteworthy that CNN highlighted on October 9, 2023, that "4,000 more UAW workers" are "on strike after rejecting deal with Mack Trucks." On the company's website , Mack refers to itself as "one of North America’s largest manufacturers of medium-duty trucks, heavy-duty trucks." This implies that Dana Incorporated's mix of "light and heavy-duty" businesses might not help to lessen the impact of the UAW strike on the company to as large an extent as was expected previously.

Also, the actual length of the strike does matter. Dana Incorporated noted at the August 2023 J.P. Morgan Auto Conference that "some of it (the impact of the UAW strike) depends" on whether "it's going to be prolonged or relatively brief," considering that "we tend to deliver axles, products just in time." As mentioned above, GM's recent move to obtain new financing could indicate that the UAW strike might take a longer amount of time to be concluded.

As such, it is worrying that the potential headwinds associated with the UAW strike haven't been fully factored into the consensus numbers for Dana Incorporated, as detailed in the next section.

There Is Room For Consensus Downgrades

Assuming that the UAW strike continues for a longer-than-expected time frame and the scope of the strike extends to more automotive OEMs and vehicle segments, analysts are likely to lower their financial forecasts for DAN substantially.

In the recent month, Dana Incorporated's consensus fiscal 2023 and FY 2024 revenue estimates were revised downwards by just -0.5% and -0.6% , respectively. The market's consensus bottom line projections for DAN in the current year and the following year were reduced by -0.4% and -1.3%, respectively, in the past month.

The sell-side's consensus target price for DAN was cut by -4.7% from $19.29 at the beginning of September to $18.38 now. Dana Incorporated's current consensus price target still points to a capital appreciation potential of +35%.

DAN's shares seem to be fairly valued at best rather than undervalued, even though the company's shares have already corrected by -13.8% in the last month. The market is now valuing Dana Incorporated at 5.6 times consensus forward next twelve months' EV/EBITDA, while the stock's three-year (prior to the pandemic outbreak in 2020) mean forward EV/EBITDA ratio was 5.2 times (source: S&P Capital IQ ).

Therefore, Dana Incorporated's shares have room to decline further, assuming that a new round of consensus downgrades is triggered by unfavorable developments relating to the UAW strike in terms of time frame or scope.

Closing Thoughts

I rate Dana Incorporated as a Hold. It pays to err on the side of caution when considering Dana Incorporated as a potential investment candidate for now. DAN's actual short-term financial results could vary significantly depending on how the UAW strike pans out going forward.

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