2023-05-22 15:52:26 ET
Summary
- Dana is poised to benefit from the new EV models traditional automotive suppliers are launching in order to compete in an electrifying world.
- The company reported solid results for Q1,23 as it beat both its revenue and earnings growth forecasts.
- Dana supplies the electric drive unit for the Ferrari SF90 Stradale and the battery cooling system for the Ford F-150 lightning.
Dana Inc ( DAN ) is a global supplier of drivetrains and electrification systems for vehicles. The company is basically enabling the EV revolution, providing the parts needed to traditional automotive manufacturers. Its systems aren't just basic quality but are known as best in class. For example, the business supplies high-end automotive companies such as Ferrari, Lamborghini, and McLaren, in addition, to your standard Ford, Audi, Toyota, Nissan, etc. The EV industry is becoming fiercely competitive as companies such as Tesla ( TSLA ) continue to grow rapidly, new EV entrants emerge (Nio, Xpeng, Lucid), and traditional automakers transition. I believe Dana Inc is the perfect way to play the forecasted growth in the EV industry without needing to pick an individual winner. In this post I'm going to break down Dana's Q1 financials, before revealing my valuation and forecasts for the stock, let's dive in.
Growing Financials
Dana reported solid financial results for the first quarter of 2023. Its revenue increased by 6.4% year over year to $2.64 billion. This was a slower growth rate than the 12.41% reported in Q4,22 and the 15% reported in Q3,22. A positive is the business still beat analyst forecasts by $83 million. In addition, foreign exchange headwinds, equating to $75 million, impacted the business due to a strong U.S. dollar. Given the cyclical pullback in the automotive market, with EV companies such as Tesla slashing prices to adjust for the lower demand, Dana is doing well.
China is also a hot topic recently and a ban on Micron ( MU ) chips was recently announced. Although not a directly-related industry, it was great to discover in the Q&A section of the earnings call, Dana only has around 5% revenue exposure to China. The business is also well-diversified across different automotive segments and manufacturers. The company generated 36% of its revenue in Q1,23 from its Light Vehicle systems. This segment actually reported a 2.3% decline in revenue. Mainstream investors may initially panic at this figure, but when we break it down, the results aren't bad. The major decline came from the aforementioned currency headwinds and rising commodity prices such as certain grades of steel, which has now begun to moderate and thus a major impact is not expected in the rest of 2023.
Another positive is Dana has a range of its systems being incorporated in a variety of new and popular automotive brands. This includes the Ford F-150 Lightning, which has Dana's custom-designed cooling systems included. This helps to keep battery temperatures stable, which is a vital need to avoid fires , such as the one which occurred in early 2023.
The Ford F-150 series (internal combustion engine) is the most popular vehicle sold in the U.S., and it has been for the past 41 years. Therefore, the fact Dana is a major supplier and aims to scale up the production of parts in the third quarter is a positive sign. Ford as a manufacturer also contributes to approximately 41% of its light vehicle drive system revenue and 17% of its Power Technologies revenue, and thus a strong tailwind is expected.
Another model Dana supplies drivelines to is the new Jeep Wrangler and aims to start the pre-production stage in the second quarter of 2023. The business is also supplying drivelines for the Jeep Gladiator, which is expected to launch in the fourth quarter of 2023.
Dana's off-highway drive and motion systems is its second-largest segment (31.8% of sales) and has continued to grow by 13.1% year over year. This is a positive sign and complements its Commercial Vehicle segment, which increased by 12.7% year over year.
Overall the business has around 120 active launches planned across its segments and thus plenty of tailwinds ahead.
Earnings and Expenses
Moving onto earnings, the business reported Adjusted EBITDA of $204 million, which increased by $34 million year over year, as its margin expanded to 7.7%. This was driven by operational cost improvements, which were offset slightly by supply chain inefficiencies, that are expected to be remedied, as customer demand stabilizes.
Its Net income increased from $17 million in Q1,22 to $28 million in Q1,23, while its earnings per share [EPS] was $0.19, which beat analyst forecasts by $0.12.
Free Cash Flow did decrease by $53 million to negative $290 million. A positive is, this was mainly driven by an $80 million increase in working capital as the company expands its production for a variety of new model launches.
Dana also has a fairly solid balance sheet, with $401 million in cash and short-term investments. In addition, to $1.8 billion in receivables. The business does have approximately $2.9 billion in total debt, of which the vast majority ($2.3 billion) is longer-term by nature and thus manageable.
Valuation and Forecasts
In order to value Dana, I have plugged its latest financial data into my discounted cash flow valuation model. I have forecast, 6% revenue growth for "next year" or the next four quarters in my model. This estimate has been derived from the midpoint of management guidance (4.4% YoY growth) for the full year of 2023, which I have estimated will accelerate in Q1,24. The observant among you may notice that this is lower than my 10% forecasted growth rate outlined in my prior assessment from December 2022, which I will put down to an underestimation of how long headwinds would last.
For years 2 to 5, I have conservatively revised my growth estimates down from 15% per year to 10% per year, to reflect the currency ramp up I expect.
Dana Stock valuation 1 (created by author Ben at Deep Tech Insights)
I have kept my pre-tax operating margin forecast the same at 6% over the next 8 years. This is fairly conservative given the company previously reported a 7% operating margin between 2013 and 2019. As foreign exchange rates correct and the business benefits from economies of scale, this margin seems to be a reasonable expectation.
Dana Stock valuation 2 (Created by author Ben at Deep Tech Insights)
Given these factors I get a fair value of $30 per share, the stock is trading at close to $13 per share at the time of writing and thus is 57% undervalued.
As an extra datapoint, Dana trades at a price to sales (P/S) ratio = 0.19, which is over 39% cheaper than its 5-year average.
Risks
Recession/Lower Demand
Given a "recession" forecast in late 2023, lower EV demand is likely, and we have already seen signals of this from Tesla. Therefore, I would expect tepid growth, especially as Dana ramps up its production throughout the year.
Final Thoughts
Dana Inc is a tremendous company that truly does offer the building blocks for a variety of popular and high-end electric vehicles. The company has continued to produce solid financial results and the gap between price and value has continued to widen. Given the aforementioned industry growth trends in the EV industry, I expect Dana to benefit over massively in 2024 and beyond.
For further details see:
Dana: Backbone Of The EV Industry Is Severely Mispriced