AMERICAN AXLE & MFG HOLDINGS AXL
April 29, 2013 - 11:46pm EST by
Rotin
2013 2014
Price: 13.54 EPS NA NA
Shares Out. (in M): 76 P/E NA NA
Market Cap (in $M): 1,029 P/FCF NA NA
Net Debt (in $M): 1,392 EBIT 190 275
TEV ($): 2,242 TEV/EBIT NA NA

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  • Auto Supplier
  • Housing
 

Description

AXL is a compelling long investment because its business is highly levered to the ongoing rebound in US housing. The significant restructuring done during the financial crisis is underappreciated and will help generate much greater earnings at lower volume. Furthermore, AXL’s expansion beyond its home turf in North America represents another significant growth driver and is fully supported by backlog that AXL has already won. Operational hiccups in 2H12 have clouded the positive story but management recently indicated these issues have successfully been resolved. As AXL performs in 2013, we believe both earnings and multiples will move higher and see 55% upside over the next 12 months to our price target $21, based on 7x 2014 EPS of $3.01, 8.4x 2014 FCF of $2.53, and 4.9x EBITDA of $577m.

Hopefully the write-up below provides the key details. For further info we'd recommend #1 II ranked autos research team at Deutsche Bank who best understands the story in our opinion.

Investment Thesis

  1. High leverage to the ongoing rebound in US housing which in turn drives sales and production of pickups and light trucks. Historically, GM’s North America sales and production volume are 92% and 96% correlated to US housing starts (see our chart here http://bit.ly/18hHMex). It's important to note that while total US light vehicle sales has rebounded to low 15m and is just 10% shy of the ~17m peak in 2001-05, volume of full-size pickups and SUVs are still very depressed (GM NA production volume in 2012 was 56% of the peak in 2003). While we don't expect housing starts or production volume to return anywhere close to peak, historical correlation suggests meaningful upside to production volume assuming housing starts normalize to a higher rate.
  2. Positive transformation underappreciated. AXL used to have very high labor cost (100% UAW, $70 all-in hourly wage). The financial crisis triggered a significant restructuring where AXL bought out most of its UAW workforce and moved production to Mexico, resulting in annual cost savings of $250m. As a result, despite depressed volume in 2010 and 2011, AXL was able to generate EBITDA margin of 15%, well above the ~13% margin achieved during the peak of the housing cycle and vehicle production volume in the middle of the last decade.
  3. High growth rate from expansion beyond North America into new geographies. AXL’s new business backlog of $1.25b will flow into revenues over the next 3 years ($400m in 2013, ramping to $950m in 2014, and $1.25b in 2015), representing a high 2012-15 CAGR of 13% on top of any growth related to US housing. Note that total 2012 revenues was $2.9b.
  4. Temporary operational hiccups successfully resolved. High start-up costs related to new business in Brazil hurt margins from a normal 15% EBITDA margin in 2010 and 2011 to 9.4%in 2H12. However, management recently indicated at the BofA last month that these issues have successfully been resolved.

Business Description

  • AXL is a Tier 1 auto supplier of driveline and drivetrain systems (e.g. axles, driveshafts, transmission parts, etc) primarily for pickups and other light trucks in North America (80% of total revenues, mainly from GM).
  • AXL used to be a captive supplier of GM and until it was spun off in 1994. Since then AXL has increasingly diversified to other OEMs but GM remains the largest customer representing 73% of revenues in 2012, followed by Chrysler at 10%. The remaining 17% comes from other OEMs such as Volkswagen, PACCAR, Ford, Tata Motors, and Nissan. Geographically, 82% of 2012 revenues came from NA, 7% from LatAm, 7% from Asia, and only 3% from Europe.
  • AXL historically had horrible FCF but this should dramatically improve as past spending to positively transform the company has been completed. In the first half of the last decade, AXL incurred very significant CapEx to modernize its plants after years of neglect inside GM (CapEx averaged 8.2% of sales in 2001-06). The plants are now in good shape and total CapEx, even including significant growth CapEx to support its international expansion, should be ~5.5% in 2014 and fall to 5% thereafter. AXL also spent $300m to buy out UAW workforce during the crisis (discussed above) and its cost now is highly competitive. Finally, last year AXL contributed $170m to fund its pension and has satisfied funding requirements for at least the next 5 years. In any case, the remaining YE’12 pension liability of ~$100m (on an after-tax basis) was manageable and will likely fall with any increase in the discount rate from the current assumption of 4%.
  • Note that AXL has significant deferred tax assets ($274m at YE’12 from NOLs, tax credit, and capital allowance carryforwards). This will allow AXL to pay a low cash tax rate of ~7.5% through 2020. 

Revenue and EBITDA Bridge from 2012 to 2014

  • The table below shows a revenue bridge from 2012 to 2014. The starting point is actual revenues in 2012 of $2,931m.
  • AXL has guided to $950m of cumulative incremental revenues from new contracts in 2013-2014. We conservatively take a 20% haircut to this figure (allowing for ramp-up delay and other unknowns) to arrive at $760m of incremental revenues.
  • The next $133m represents increased content (7.5% per midpoint of guidance or $111 per vehicle) on actual 2012 production volume of pickups/SUVs for GM and Chrysler (~1.2m units) driven mainly by transition of GM truck platforms (from GMT900 to K2XX) beginning in Apr '13 to early 2014.
  • The final $256m represents greater production volume of pickups/SUVs for GM and Chyrsler from 2012 to 2014 based on strong historical correlation with US housing starts (assumed to reboud from 1.04m in Mar '13 to 1.35m in 2014). The $256m figure is based on $1,583 content per unit on 162k incremental vehicle units produced.
  • These items bridge to 2014 revs of $4,081m. We see this as conservative and wouldn’t be surprised to see 5% upside to this estimate.
  • On EBITDA, we first note that adjusted margins were 14.9% both in 2010 and 2011. As discussed previously, margin fell in 2012 due to unusually high start-up costs. We estimate that excluding unusual costs, baseline margin would have been mid 14’s in 2012.
  • There are a number of drivers from 2012 to 2014. First, increased production volume on legacy GM/Chrysler programs should carry very high incremental margins (~30%). This will be offset by lower margin from new businesses (which are less capital intensive) and typical price concession as contracts mature and potential cost increases. Net/net, we conservatively estimate 2014 EBITDA margin at 14.15% and EBITDA of $577m.
Revenue Bridge  
2012 actual revenues 2,931
New business wins 2013-14   (20% haircut) 760
Increased content on 2012   GM/Chysler volume 133
Incremental production volume 256
2014 estimated revenues 4,081

 

Valuation

 
Valuation Summary Current   Target  
Price $13.54   $21.00  
S/O 76.0   76.0  
Market cap 1,029   1,596  
Cash (62)   (62)  
Debt 1,454   1,454  
Pension (after tax) 96   96  
Deferred tax assets (NOLs, tax credit, capital allowance) (274)   (274)  
EV 2,242   2,809  
         
  2013E 2014E 2013E 2014E
EV / EBITDA 5.1x 3.9x 6.4x 4.9x
P / E 7.6x 4.5x 11.8x 7.0x
P / FCF 16.5x 5.3x 25.6x 8.3x
Net leverage 3.2x 2.4x 3.2x 2.4x

 

Financial Summary
 
  2013E 2014E
Sales 3,320 4,081
EBITDA 440 577
Margin 13.3% 14.1%
D&A (165) (190)
Interest (110) (106)
EBT 165 281
Taxes, GAAP (29) (49)
Tax rate 17.5% 17.5%
Net inc 136 232
S/O 76.3 76.9
EPS $1.78 $3.01
     
EBT 165 281
Cash taxes (12) (21)
Tax rate 7.5% 7.5%
Working cap (30) (30)
D&A 165 190
CapEx (225) (225)
FCF 63 195
FCF/sh $0.82 $2.53
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

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    Description

    AXL is a compelling long investment because its business is highly levered to the ongoing rebound in US housing. The significant restructuring done during the financial crisis is underappreciated and will help generate much greater earnings at lower volume. Furthermore, AXL’s expansion beyond its home turf in North America represents another significant growth driver and is fully supported by backlog that AXL has already won. Operational hiccups in 2H12 have clouded the positive story but management recently indicated these issues have successfully been resolved. As AXL performs in 2013, we believe both earnings and multiples will move higher and see 55% upside over the next 12 months to our price target $21, based on 7x 2014 EPS of $3.01, 8.4x 2014 FCF of $2.53, and 4.9x EBITDA of $577m.

    Hopefully the write-up below provides the key details. For further info we'd recommend #1 II ranked autos research team at Deutsche Bank who best understands the story in our opinion.

    Investment Thesis

    1. High leverage to the ongoing rebound in US housing which in turn drives sales and production of pickups and light trucks. Historically, GM’s North America sales and production volume are 92% and 96% correlated to US housing starts (see our chart here http://bit.ly/18hHMex). It's important to note that while total US light vehicle sales has rebounded to low 15m and is just 10% shy of the ~17m peak in 2001-05, volume of full-size pickups and SUVs are still very depressed (GM NA production volume in 2012 was 56% of the peak in 2003). While we don't expect housing starts or production volume to return anywhere close to peak, historical correlation suggests meaningful upside to production volume assuming housing starts normalize to a higher rate.
    2. Positive transformation underappreciated. AXL used to have very high labor cost (100% UAW, $70 all-in hourly wage). The financial crisis triggered a significant restructuring where AXL bought out most of its UAW workforce and moved production to Mexico, resulting in annual cost savings of $250m. As a result, despite depressed volume in 2010 and 2011, AXL was able to generate EBITDA margin of 15%, well above the ~13% margin achieved during the peak of the housing cycle and vehicle production volume in the middle of the last decade.
    3. High growth rate from expansion beyond North America into new geographies. AXL’s new business backlog of $1.25b will flow into revenues over the next 3 years ($400m in 2013, ramping to $950m in 2014, and $1.25b in 2015), representing a high 2012-15 CAGR of 13% on top of any growth related to US housing. Note that total 2012 revenues was $2.9b.
    4. Temporary operational hiccups successfully resolved. High start-up costs related to new business in Brazil hurt margins from a normal 15% EBITDA margin in 2010 and 2011 to 9.4%in 2H12. However, management recently indicated at the BofA last month that these issues have successfully been resolved.

    Business Description

    • AXL is a Tier 1 auto supplier of driveline and drivetrain systems (e.g. axles, driveshafts, transmission parts, etc) primarily for pickups and other light trucks in North America (80% of total revenues, mainly from GM).
    • AXL used to be a captive supplier of GM and until it was spun off in 1994. Since then AXL has increasingly diversified to other OEMs but GM remains the largest customer representing 73% of revenues in 2012, followed by Chrysler at 10%. The remaining 17% comes from other OEMs such as Volkswagen, PACCAR, Ford, Tata Motors, and Nissan. Geographically, 82% of 2012 revenues came from NA, 7% from LatAm, 7% from Asia, and only 3% from Europe.
    • AXL historically had horrible FCF but this should dramatically improve as past spending to positively transform the company has been completed. In the first half of the last decade, AXL incurred very significant CapEx to modernize its plants after years of neglect inside GM (CapEx averaged 8.2% of sales in 2001-06). The plants are now in good shape and total CapEx, even including significant growth CapEx to support its international expansion, should be ~5.5% in 2014 and fall to 5% thereafter. AXL also spent $300m to buy out UAW workforce during the crisis (discussed above) and its cost now is highly competitive. Finally, last year AXL contributed $170m to fund its pension and has satisfied funding requirements for at least the next 5 years. In any case, the remaining YE’12 pension liability of ~$100m (on an after-tax basis) was manageable and will likely fall with any increase in the discount rate from the current assumption of 4%.
    • Note that AXL has significant deferred tax assets ($274m at YE’12 from NOLs, tax credit, and capital allowance carryforwards). This will allow AXL to pay a low cash tax rate of ~7.5% through 2020. 

    Revenue and EBITDA Bridge from 2012 to 2014

    Revenue Bridge  
    2012 actual revenues 2,931
    New business wins 2013-14   (20% haircut) 760
    Increased content on 2012   GM/Chysler volume 133
    Incremental production volume 256
    2014 estimated revenues 4,081

     

    Valuation

     
    Valuation Summary Current   Target  
    Price $13.54   $21.00  
    S/O 76.0   76.0  
    Market cap 1,029   1,596  
    Cash (62)   (62)  
    Debt 1,454   1,454  
    Pension (after tax) 96   96  
    Deferred tax assets (NOLs, tax credit, capital allowance) (274)   (274)  
    EV 2,242   2,809  
             
      2013E 2014E 2013E 2014E
    EV / EBITDA 5.1x 3.9x 6.4x 4.9x
    P / E 7.6x 4.5x 11.8x 7.0x
    P / FCF 16.5x 5.3x 25.6x 8.3x
    Net leverage 3.2x 2.4x 3.2x 2.4x

     

    Financial Summary
     
      2013E 2014E
    Sales 3,320 4,081
    EBITDA 440 577
    Margin 13.3% 14.1%
    D&A (165) (190)
    Interest (110) (106)
    EBT 165 281
    Taxes, GAAP (29) (49)
    Tax rate 17.5% 17.5%
    Net inc 136 232
    S/O 76.3 76.9
    EPS $1.78 $3.01
         
    EBT 165 281
    Cash taxes (12) (21)
    Tax rate 7.5% 7.5%
    Working cap (30) (30)
    D&A 165 190
    CapEx (225) (225)
    FCF 63 195
    FCF/sh $0.82 $2.53
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    SubjectWorking capital
    Entry04/30/2013 04:45 PM
    Membercfavenger
    Great writeup Rotin.
     
    One question - you have working capital going up at a pretty muted rate despite the large increase in sales.  Can you provide some of your thinking on why the working capital increase is so low?
     
     

    SubjectRE: Working capital
    Entry05/02/2013 08:18 PM
    MemberRotin
    Good question cfavenger. Net working cap (A/R+Inv-A/P-Accrued Exp) has historically been near zero. If you look at rolling 4-quarter average NWC as % of LTM sales, this ratio typically swings around a few percent negative to positive. (The exception was in 2009-10 when GM was distressed and AXL had a favorable expedited payment terms which allowed AXL to maintain a meaningful negative NWC, ie a source of cash).
     
    At YE'12, rolling 4-qtr NWC was 2.45% of sales. Assuming this remains constant every $500m of incremental revs would require $12m of incremental NWC. We're assuming $30m to be conservative and in case the ratio moves up a touch.

    SubjectRE: You missed the biggest driver
    Entry05/02/2013 08:23 PM
    MemberRotin
    We discussed the GMT900 to K2XX transition, including the greater dollar content. Our volume assumption incorporates greater GM's market share thanks to K2XX.
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