American Axle (AXL) Plunges 34.8% in a Year: Will it Rebound?

American Axle & Manufacturing Holdings, Inc.’s AXL share-price movement has been dismal, both in absolute and relative terms. Shares of the Detroit-based global automotive parts supplier have plunged 34.8% over the past year, underperforming its industry's rise of 11.7%.

Operational inefficiency, U.S.-Sino trade tiff, bleak 2019 guidance and tepid financials have been weighing on the stock. Investor sentiment was also hurt by third-quarter 2019 results, wherein both earnings and revenues declined year over year, affected by the UAW-General Motors strike GM.

Let’s delve deeper upon the factors responsible for the dismal price performance and results of the company.

What’s Weighing on the Stock?

Higher manufacturing costs due to material freight and inflationary pressures, along with program launch costs, have dampened American Axle’s profit margin. Further, restructuring and acquisition-related costs and research and development costs are other cost headwinds for the company. American Axle’s high leverage of 72.27% is further restricting the firm’s financial flexibility. This will flare up interest costs, which might clip its net profit.

Bleak guidance for 2019 amid unfavorable impact from the 40-day strike of its largest customer General Motors has also dampened investors’ confidence. For the year, American Axle anticipates sales of $6.6 billion, down from the previous projection of $6.9-$7 billion. Adjusted EBITDA forecast is now expected in the band of $950-$975 million compared with the prior estimate of $1.05-$1.10 billion. Adjusted FCF is projected at $175 million, lower than the previous view of 250 $million. American Axle, in a bid to expand its global footprint, had formed a joint venture in China to build driveline systems. However, tariff woes in China have dampened the company’s prospects in the nation.

American Axle’s major OEM customers have been demanding concessions in the form of lower prices. If the company gives in to the demand for higher annual-price reductions and is unable to offset the impact of the same through technology improvements and cost cuts, its operational results and financial condition will be affected.

Silver Lining

Amid above-mentioned headwinds, American Axle’s fresh program launches will boost its financials in the days ahead. Also, new business backlogs and reduced production downtime by automakers will be other positives.

The company’s acquisition of Metaldyne Performance Group, Inc. has widened its operating scale, customer base and end markets. Further, Metaldyne’s expertise in complex, highly-engineered powertrain components will aid the company to offer better products to customers. American Axle expects to achieve synergy run rate of $120-$140 million in the current year, which will help expand margins.

American Axle’s efforts to diversify its business, products and customer base are anticipated to generate incremental revenues. Apart from General Motors and Fiat Chrysler FCAU, the company supplies driveline systems and other components to Jaguar Land Rover, Ford F, Harley-Davidson, Volkswagen, Nissan, Honda, Mercedes-Benz, Isuzu and various other OEMs. In addition, the company is gaining new businesses with its latest innovative driveline solution. It believes this will spur customer demand for advanced technologies, leading to greater business diversification and significant growth.

This Zacks Rank #3 (Hold) company’s agreement to sell its U.S iron casting operations for $245 million also bodes well. The sale will help the firm streamline its portfolio, reduce debt and improve margin profile. Net cash proceeds from the transaction will be used to repay American Axle’s outstanding debt. Further, this will aid the company to invest in its highly-engineered product portfolio and more profitable growth opportunities, including electrification, which will bolster its value proposition.

You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

In Conclusion

Lower global production volumes, along with escalating operating costs and weak financials, has been hurting American Axle. However, we believe product launches, along with strategic buyouts and divestments to optimize portfolio, will yield favourable results in the upcoming period.

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