Power Technologies Integration And Hybrid Transmission Will Improve Efficiency

Key Takeaways

• Accelerated cost reduction and integration of Power Technologies improve margins and profitability through significant savings and efficiency gains.
  
• Hybrid transmission business growth and full tariff recovery promise stable revenues and substantial future earnings.
  
• Economic volatility and strategic adjustments in the EV sector pose risks to Dana's revenue growth, profitability, and market opportunities.

Catalysts

Provides power-conveyance and energy-management solutions for vehicles and machinery in North America, Europe, South America, and the Asia Pacific.

• Dana is accelerating its cost reduction program, increasing it from $175 million to $225 million for 2025, with plans for $300 million total, which should contribute significantly to improving net margins and overall earnings.
  
• The integration of Power Technologies into the Light Vehicle and Commercial Vehicle segments, generating immediate $30-$35 million in savings, is expected to enhance operational efficiency, supporting margins and profitability.
  
• Despite tariff headwinds, Dana anticipates full recovery from customers through negotiated mechanisms, which should stabilize revenue streams and mitigate any negative impacts on earnings.
  
• Dana is focused on reducing CapEx and optimizing free cash flow, targeting $50 million from portfolio divestitures in the second quarter and potential additional $50 million later, potentially boosting net income and leveraging ongoing cost efficiencies.
  
• The launch and expected growth of the hybrid transmission business, projected to reach $200-$300 million in sales at high EBITDA margins, presents a promising revenue growth opportunity with an accretive impact on future earnings.

Dana Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dana's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.4% today to 2.6% in 3 years time.
• Analysts expect earnings to reach $263.8 million (and earnings per share of $1.26) by about May 2028, up from $-35.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.1x on those 2028 earnings, up from -60.8x today. This future PE is lower than the current PE for the US Auto Components industry at 14.1x.
• Analysts expect the number of shares outstanding to grow by 0.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.16%, as per the Simply Wall St company report.

Dana Future Earnings Per Share Growth

Risks

• The uncertainty and volatility in tariff regulations can create unpredictable financial impacts, including delayed recovery of tariff costs, which may affect Dana's revenues and profit margins.
  
• Dana is facing a reduction in demand across all its end markets, significantly impacting sales and profitability, which could hinder revenue growth and net earnings.
  
• Increased risk and resizing efforts within the EV sector, as Dana adjusts its strategy, could lead to potential losses in market opportunities and reductions in future revenue streams.
  
• The divestiture of noncore businesses and assets, while aimed at improving focus and capital allocation, may decrease revenue diversity and could pose a risk if these divestitures do not yield expected returns.
  
• Economic headwinds in the North American commercial vehicle sector, coupled with high vehicle inventory levels, present risks to Dana's revenue and profit sustainability as demand for light trucks continues to fluctuate.

Valuation

• The analysts have a consensus price target of $17.429 for Dana 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 $23.0, and the most bearish reporting a price target of just $11.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.0 billion, earnings will come to $263.8 million, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 10.2%.
  
• Given the current share price of $14.59, the analyst price target of $17.43 is 16.3% 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.