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Why Shares of American Axle & Manufacturing Holdings Inc. Are Dropping 14%

By Daniel Miller – Updated Nov 3, 2016 at 2:59PM

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American Axle had a slightly better-than-expected third quarter, but its shares are slumping for another reason: its acquisition of Metaldyne Performance Group.

Image source: Getty Images.

What happened

It's been quite a morning for American Axle & Manufacturing Holdings Inc. (AXL -2.63%), a leading supplier to the automotive industry and a worldwide leader in manufacturing, engineering, design, and validation of driveline and drivetrain systems for trucks, SUVs, cars, and crossovers. Not only did the company announce its third-quarter results, but it also revealed that it would acquire Metaldyne Performance Group Inc. As of 11:50 a.m. EDT, shares of American Axle are down 14%, while Metaldyne shares are up 42%.

So what

Starting first with American Axle's third-quarter highlights, the company generated top-line revenue of $1.01 billion, right in line with analysts' estimates and ahead of last year's $971 million. American Axle's net income during the third quarter was $61.7 million, up slightly from last year's $60.9 million. That equates to earnings per share of $0.78, a penny ahead of analyst estimates.

"AAM's third quarter financial results continued to reflect strong production volumes and solid performance in our global manufacturing operations," said American Axle Chairman and CEO David C. Dauch in a press release. "Our year-to-date financial performance positions AAM to achieve record sales and profit in 2016."

Despite a better-than-expected third-quarter profit, shares of American Axle declined as it agreed to acquire Metaldyne, but that doesn't mean it's a bad move.

Now what

American Axle will acquire Metaldyne for approximately $1.6 billion in cash and stock, plus the assumption of $1.7 billion in net debt; American Axle will pay $13.50 in cash per share to each Metaldyne shareholder, as well as 0.5 share of American Axle common stock. For American Axle, the purchase is at an implied multiple of 6.8 times adjusted EBITDA, based on 2016 estimates, and an even lower 5.5 times multiple when including synergies. Financially, American Axle expects the acquisition to be accretive to earnings and free cash flow during the first full year of ownership and that cost synergies should be between $100 million to $120 million annually by 2018.

The great news for investors of American Axle, regardless of the market sending the stock 15% lower today, is that its dependence on General Motors is now significantly lessened. Consider that last year 66% of American Axle's sales came from GM and another 20% from FCA. If you add in Metaldyne's financials to American Axle's results last year, that would have taken GM's percentage of American Axle's total sales down to 41% and FCA's down to 15%. Long term, this should be a solid move for American Axle as it has decreased its dependence on GM, increased its business scale, and diversified its products, customers and end markets.

Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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