Summary
- American Axle & Manufacturing Holdings continues to generate promising financial results, even though it experienced a bit of weakness in EBITDA.
- Guidance for 2023 indicates that the picture should improve from here.
- Add on top of this how cheap shares are, and it's clear Mr. Market is ignoring this opportunity.
One of the more frustrating things about the stock market is that, for reasons that can't be explained, the price of securities can diverge significantly from the value of the firms in question. This can also be a great benefit to those seeking to buy attractive investments. However, when you find that investment, only to see it struggle to appreciate while the broader market climbs higher, the process can be unnerving. One firm where this has taken place recently is American Axle & Manufacturing Holdings ( AXL ). Despite posting some rather impressive results and having high expectations for the new fiscal year, shares of the company have barely budged over the past couple of months. For those who have owned the stock during this time, it may be tempting to sell out and look elsewhere for upside. But for those who focus solely on the fundamentals and without too much regard for the short term, now might be a great time to consider buying in.
Great results fail to impress
The last article I wrote about American Axle & Manufacturing Holdings was published in early November of 2022. Leading up to that point, the company had demonstrated significant volatility, with some of that being due to rumors that it might be bought out. Management clarified that they were not in any active discussions about such a maneuver. Having said that, there's no guarantee it won't come to pass. Obviously, I viewed this as a slightly positive catalyst that may or may not come true. However, I also recognized that the fundamental condition of the business was improving and that shares were trading on the cheap. All of these factors combined made me bullish about the company, resulting in my decision to keep it rated a ’buy’. Since then, however, the business has struggled to generate any real upside. Shares are up only 0.2% at a time when the S&P 500 has risen by 6.6%.
The most obvious culprit for this underperformance would be poor fundamental data coming out. But this has not been the case. Consider the final quarter of the company's 2022 fiscal year. This is the only quarter for which new data is available that was not available when I wrote about the business previously. During that time, sales came in at $1.39 billion. That's 12.8% higher than the $1.24 billion the business generated only one year earlier. Management did not provide much in the way of detail behind this sales increase. But they did say that it was driven by the firm’s purchase of Tekfor, as well as higher sales volumes and a change in product mix.
On the bottom line, the picture also improved. The firm went from generating a net loss of $46.3 million in the final quarter of 2021 to generating a profit of $13.9 million the same time of the 2022 fiscal year. Operating cash flow also managed to increase nicely, shooting up from $102.4 million to $148.5 million. The only metric that worsened year over year was EBITDA. According to management, this dropped from $164.6 million to $157.7 million.
The final quarter of 2022 was not a one-time event. 2022 in its entirety was quite bullish for investors. According to management, sales during this time came in at $5.80 billion. That compares favorably to the $5.16 billion generated in 2021. This increase of approximately 12.5% Was driven by a combination of factors. $204 million of the $645.8 million increase year over year was attributable to the aforementioned acquisition. Another $189 million worth of the sales increase was driven by improving supply chain issues. On the bottom line, meanwhile, net income for the business expanded from only $5.9 million to $64.3 million. Operating cash flow went from $538.4 million down to $448.9 million. And EBITDA shrank from $833.3 million to $747.3 million. These cash flow pressures were driven by multiple factors as well. For instance, while revenue for the company increased 12.5% in 2022, its cost of goods sold grew by 15%. There were also other factors that inflated net income relative to cash flow. One example would be an unrealized loss on equity securities of $25.5 million in 2022 compared to a loss of $24.4 million one year earlier. Another example would be a $52.2 million drop in depreciation and amortization costs.
While the market may be somewhat disappointed by the cash flow metrics reported by the company, these largely were the result of weakness in prior quarters that should have already been priced in. In addition, management came out with some rather promising guidance for the 2023 fiscal year. They currently expect revenue to be between $5.95 billion and $6.25 billion. Even at the low end, this would translate to an increase in revenue year over year. Backing out some data using what else management forecasted would imply operating cash flow of $491.3 million and the company did say that EBITDA should be between $725 million and $800 million.
Using these numbers, I calculated that the company is trading at a forward price to adjusted operating cash flow multiple of 2.3 and at a forward EV to EBITDA multiple of 4.7. Using, instead, the data from 2022, these multiples should be 2.6 and 4.8, respectively. As part of my analysis, I also decided to compare the company to five similar enterprises. On a price to operating cash flow basis, these companies ranged from a low of 4.4 to a high of 18. In this case, American Axle & Manufacturing Holdings was the cheapest of the group. Using the EV to EBITDA approach instead, the range came in at between 4.8 and 9.1. In this case, our target was tied with one other firm as the cheapest.
Company | Price / Operating Cash Flow | EV / EBITDA |
American Axle & Manufacturing Holdings | 2.6 | 4.8 |
Patrick Industries ( PATK ) | 4.4 | 4.8 |
Modine Manufacturing ( MOD ) | 18.0 | 9.1 |
Standard Motor Products ( SMP ) | 11.6 | 7.7 |
BorgWarner ( BWA ) | 7.6 | 8.5 |
Lear ( LEA ) | 8.5 | 8.5 |
Takeaway
Based on what data I see today, I remain perplexed as to why the broader market has not rewarded shareholders comfortably. Although I recognize that the company may not be the greatest investment opportunity, shares are incredibly low, and recent performance has been robust. What's more, if management is correct in their assessment, then we should see additional improvement during the current fiscal year. This would make shares even cheaper by comparison. Because of all of these factors, I do believe that the ‘buy’ rating I had on the stock was not misplaced and I believe that the picture for the enterprise moving forward should be promising.
For further details see:
American Axle: Mr. Market Is Ignoring This Value Play