Legacy Driveline Demand Will Decline Despite Reshoring Benefits

Key Takeaways

• The shift to electric vehicles threatens key revenue streams and increases competitive pressure, challenging the company’s ability to adapt and maintain profitability.
  
• Dependence on major automakers and high debt levels raise financial risk, especially amid costly investment needs and uncertain EV market adoption.
  
• The company is well-positioned for profitable growth through operational efficiency, strong demand for core products, and strategic alignment with industry trends despite slower market transitions.

Catalysts

Designs, engineers, and manufactures driveline and metal forming technologies that supports electric, hybrid, and internal combustion vehicles.

• The rapid electrification of the automotive fleet threatens to accelerate the decline in demand for internal combustion engine driveline components, which currently constitute the majority of American Axle & Manufacturing’s revenues; this structural market erosion could cause future year-over-year sales declines that are not offset quickly enough by growth in newer EV-oriented products.
  
• The ongoing industry shift toward simplified EV architectures and integrated e-axle solutions reduces replacement and aftermarket revenue opportunities, putting severe long-term pressure on both margins and top-line growth as legacy revenue streams dry up.
  
• Heavy revenue concentration with General Motors and other large OEMs exposes the company to significant earnings volatility if even a single platform or volume commitment is lost or downsized, and the increasing bargaining power of automakers in the transition to electrified platforms may further compress margins.
  
• Persistently high debt levels, combined with substantial capital expenditure requirements for retooling toward electric and advanced mobility systems, risk further compressing net margins through elevated interest and depreciation costs, especially if the pace of EV adoption underperforms company expectations and leads to stranded assets.
  
• Intensifying competition from new, vertically integrated EV suppliers and global powertrain leaders threatens to erode American Axle’s future market share in both driveline and advanced e-mobility segments, potentially driving down pricing and limiting long-term earnings growth as industry incumbents struggle to adapt to evolving vehicle architectures.

American Axle & Manufacturing Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on American Axle & Manufacturing Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming American Axle & Manufacturing Holdings's revenue will decrease by 1.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.3% today to 1.4% in 3 years time.
• The bearish analysts expect earnings to reach $79.7 million (and earnings per share of $0.65) by about July 2028, up from $20.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 27.7x today. This future PE is lower than the current PE for the US Auto Components industry at 14.4x.
• Analysts expect the number of shares outstanding to grow by 0.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

American Axle & Manufacturing Holdings Future Earnings Per Share Growth

Risks

• The combination with Dowlais offers significant scale and an estimated three hundred million dollars of synergies, which could drive both revenue and margin growth by broadening the customer base and product offerings, thus supporting long-term earnings.
  
• Nearshoring and supply chain localization trends, along with the company’s high USMCA compliance and U.S.-sourced materials, position American Axle to benefit from reshoring and government policies aimed at strengthening domestic manufacturing, likely resulting in more stable revenue and improved cash flows.
  
• Continued robust demand for core platforms such as GM and Ram heavy-duty trucks, alongside strong order volumes in SUVs and full-sized trucks, supports resilient top-line revenue while leveraging the company’s existing capital base for higher profitability.
  
• Operational improvements, productivity initiatives, and an ongoing focus on cost discipline and automation are already boosting EBITDA margins amid challenging sales environments, indicating further potential for rising net income even in flat or slightly declining markets.
  
• A slowing pace of electrification and extended lifespans for internal combustion engine and hybrid vehicles play to American Axle’s strengths in legacy driveline systems, allowing for continued high cash flow and profitability from existing assets while the company incrementally advances its EV capabilities for future revenue diversification.

Valuation

• The assumed bearish price target for American Axle & Manufacturing Holdings is $4.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of American Axle & Manufacturing Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.5, and the most bearish reporting a price target of just $4.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.7 billion, earnings will come to $79.7 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 11.6%.
• Given the current share price of $4.84, the bearish analyst price target of $4.0 is 21.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.