STLA - Short American Axle Going Into Earnings

2023-10-29 08:00:00 ET

Summary

• The UAW strike has expanded to Stellantis's largest US factory, affecting production of the RAM 1500 pickup truck.
• American Axle, a supplier to Stellantis, may be significantly impacted by the strike, as it generates 18% of its revenue through its partnership with Stellantis.
• The strike could have a negative impact on American Axle's valuation and financial performance, potentially falling short of FY23 guidance.

The biggest concern in the automotive industry is how much the UAW strike will affect production. The Wall Street Journal reported on October 24, 2023 that the UAW strike has expanded to Stellantis's (STLA) largest US factory, the Sterling Heights facility, affecting their production of the RAM 1500 pickup truck. This facility is said to produce 27% of the firm's overall output of the pickup truck. As for American Axle, this may have major implications to management's FY23 revenue and EBITDA targets. With the current outlook of the ongoing strike and labor stoppage along with forecasts from the automotive industry, I provide American Axle a SELL recommendation with a price target of $5.01 for a 4.50x eFY23 EV/EBITDA multiple.

Luckily for Stellantis, 71 days of unsold inventory is en route to dealership lots, allowing some breathing room to weather the storm. Unfortunately for suppliers, this production stoppage may be more harmful the further up the supply chain we go. American Axle (AXL) is one of those firms that may be affected by the strike as 18% of revenue is generated through their partnership with Stellantis. The UAW strike that began on September 15, 2023 has strongly affected General Motors (GM) production, another major customer of American Axle at 40% of net sales in FY22. Ford ( F ) accounts for 12% of net sales.

So far the stock is down roughly 9% since the start of the strike. Though much of this movement appears to be beta, there could be a very real impact to the company's valuation come their earnings call on November 3rd, 2023.

The challenge, and I believe this is why the earnings call will be a catalyst, is that no new information has been released by the firm since September 12, 2023, a few days before the UAW strike began.

Macro & Financials

American Axle has experienced a rocky resurgence as the automotive industry made its attempt to pick up production back to pre-C19 levels in 2023.

Along with the challenging production market, American Axle has been faced with tightening margins due to an equally challenging commodities market, transportation costs, labor inflation, and challenges in securing semiconductors. Between these factors and challenges at customer sites between production stoppages, American Axle has experienced a challenging 1h23. These effects have trickled throughout their operations resulting in tighter margins and higher inventory on hand.

Guidance from their recent investor presentation put American Axle's FY23 figures at $5,950-6,250mm in revenue and $725-800mm in aEBITDA for a margin of 12-13%. Considering their current financial position with trailing EBITDA coming in at $693mm, achieving that level of EBITDA already looked relatively bleak given the declining trends in EBITDA margins. The UAW walkout will only add pressure to American Axle's ability to generate cash.

With the presumption that 27% of production taken offline at the Stellantis factory translates directly to American Axle and how late into q3'23 the strike at this facility began, we can expect the decline to really take form in q4'23. With these assumptions, this plant can be expected to affect -6% of revenue from Stellantis and -4% of total revenue. Extrapolating datapoints for other manufacturers will be challenging, but I will do my best with what information is public.

In Q3, the UAW strike had a roughly $200 million EBIT impact, and so far in Q4, we estimate the lost production has had an incremental $600 million EBIT impact. - Paul Jacobson, GM

Using historical financials for GM, this equates to roughly 30% of q4 EBIT. Translating that to production volumes will be challenging as GM experienced production growth y/y for q3'23 in accordance with their q3'23 earnings presentation. Just to clarify, GM's q3'23 sales volumes continued to grow on a y/y basis; however, the effects of the strike may not be seen until q4'23.

Ford released their q3'23 financials on October 26th but didn't disclose the financial implications of the UAW strike. We can potentially expect similar figures as a result of the strike. Using these figures, we can expect a -5% decline in revenue as a ballpark figure for FY23.

To be clear, the figures derived for Ford are based on figures from GM's call. Ford retracted any FY23 guidance and voiced uncertainty in the firm's financial results for the remainder of the year as a result of the strike. Though there is a tentative agreement in place, nothing is final. The assumptions in my model are only through FY23 and not beyond. From here, the figures could get much worse if the strike were to expand or be slightly better than my forecast given the remaining two months of FY23. This does not take into account any cascading effects as a result of the strike.

Valuation

There is no telling exactly how deep the strike will cut into future earnings given the duration and expansion of the walkouts. Only time will tell how much this will affect American Axel's profitability. With the profitability forecast laid out by GM and extrapolating that information to American Axle, we can presume American Axle will fall short of FY23 guidance range by -4-9% (management guidance: $5,950-6,250mm) on the topline and -9-18% (management guidance: $725-800mm) for EBITDA and experience some degree of margin compression. With this, I provide AXL shares a SELL recommendation with a price target of $5.01/share, or a 29% decline in share price.

Shorting AXL shares comes with a borrowing cost of 80bps. There are a lot of risks involved in shorting shares, including unlimited downside risk. My recommendation is to go into their earnings and to do your due diligence prior to entering a position. For those less experienced in trading, my recommendation is to wait out American Axle's earnings calls prior to initiating a position.

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