Dowlais Merger Will Create Leading Global Driveline And Metal Forming Supplier

Key Takeaways

• Diversification from North American markets reduces risks, while strong synergies with Dowlais enhance revenue, margins, and global growth potential.
  
• Securing long-term contracts provides revenue stability, with positive customer reception indicating potential for increased global market share.
  
• Challenges from strategic integration, future production fluctuations, and platform reliance pose risks to American Axle's revenue, cash flow, and investor confidence.

Catalysts

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

• The transformational combination with Dowlais is expected to create a leading global driveline and metal forming supplier with significant size and scale, potentially enhancing revenue and margin opportunities through synergies and cross-selling opportunities.
  
• The $300 million run-rate synergies anticipated from the Dowlais merger are expected to improve adjusted EBITDA margin from 12.2% to approximately 14%, enhancing overall earnings potential.
  
• The strategic focus on securing long-term contracts, such as the contract extension with Ford for the Maverick and Bronco Sport vehicles, provides revenue visibility and stability for AAM's core legacy Driveline business.
  
• The significant reduction in North American dependency post-transaction is expected to diversify revenue streams and reduce operational risks associated with market fluctuations in a single geography.
  
• The positive reception from customers regarding the merger indicates potential for increased market share and revenue growth in global markets, supported by an expanded product portfolio and enhanced customer relationships.

American Axle & Manufacturing Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American Axle & Manufacturing Holdings's revenue will decrease by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.6% today to 0.7% in 3 years time.
• Analysts expect earnings to reach $41.8 million (and earnings per share of $0.34) by about May 2028, up from $33.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $61 million in earnings, and the most bearish expecting $22.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.3x on those 2028 earnings, up from 13.4x today. This future PE is greater than the current PE for the US Auto Components industry at 14.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

American Axle & Manufacturing Holdings Future Earnings Per Share Growth

Risks

• The reduced North American production in 2024 and potential fluctuations in production due to interest rates, tariffs, and consumer financial health could negatively impact AAM's future revenues and profitability.
  
• The strategic combination with Dowlais entails execution risks and the challenge of successfully integrating two large entities, which might divert focus from core operations and affect net margins or earnings.
  
• The anticipated increase in capital expenditures for next-generation truck platforms in 2025 could pressure AAM's ability to maintain or grow free cash flow, impacting overall financial performance.
  
• The reliance on a few key platforms, such as GM's full-size trucks and SUVs, poses a concentration risk. Any downturn in these areas could significantly affect AAM's revenues and profitability.
  
• Continued losses in adjusted earnings per share, as seen in the fourth quarter of 2024, indicate potential ongoing challenges in turning revenue growth into positive net earnings, which could dampen investor confidence.

Valuation

• The analysts have a consensus price target of $4.943 for American Axle & Manufacturing Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $3.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.8 billion, earnings will come to $41.8 million, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 11.4%.
• Given the current share price of $3.84, the analyst price target of $4.94 is 22.3% higher.
• 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.