Please ensure Javascript is enabled for purposes of website accessibility

Does American Axle's Blockbuster Q3 Make It a Buy Now?

By Daniel Miller - Nov 8, 2017 at 6:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Many investors are shying away from cyclical automotive investments, but does American Axle's third quarter suggest it's a good buy?

There's plenty of pessimism among Wall Street and Main Street investors about the state of the U.S. auto industry. While sales are currently near all-time highs annually, we're almost certainly at the peak of the cycle, and that means a slowdown ripple effect for companies such as American Axle Manufacturing (AXL 6.82%) is coming. Such is life in a cyclical industry.

But that doesn't mean all hope is lost for long-term investors. Does American Axle's incredible third quarter prove the point? Let's dig in.

By the numbers

Starting from the top, American Axle (AAM) posted revenue of $1.72 billion during the third quarter, which beat analysts' estimates calling for $1.62 billion. American Axle also beat on the bottom line with adjusted earnings per share checking in at $0.86, well above analysts' estimates of $0.64 per share. Comparing those results to the prior-year quarter reveals some explosive growth: Revenue, net income, and free cash flow jumped 70%, 40%, and 61%, respectively, over the prior year.

The strong performance was enough for management to boost its full-year guidance. American Axle now expects full-year revenue to check in between $6.2 billion and $6.25 billion, compared with prior guidance of about $6.1 billion. Management also said adjusted EBITDA is expected to check in at the high end of guidance, about $1.1 billion.

A Parked Ford Mustang with American Axle products and brand images

Image source: American Axle.

"AAM's third-quarter performance was highlighted by continued sales growth, business diversification, and cash flow generation as a result of our recent strategic actions and the realization of our new and incremental business backlog," said Chairman and Chief Executive Officer David C. Dauch in a press release.

While the third quarter trounced prior-year results, investors have to remember that much of the performance was fueled by the acquisition of Metaldyne Performance Group (MPG). Nothing wrong with that, as acquisitions can be a great way to expand if done right, and for American Axle, it helps lessen its dependence on General Motors' (GM 1.70%) business. Remember that American Axle remained under General Motors' umbrella until the early 1990s, and the business connection remains a huge part of the company. Not only did the MPG acquisition drive American Axle's total results higher, but the company also did more than $1 billion of non-GM sales, or 59% of total sales -- both quarterly records.

The question remains

Does this strong third quarter, and an acquisition on track to generate $100 million to $120 million of synergies by the first quarter of 2019, make American Axle a buy right now? The market sure isn't convinced, as American Axle trades at a paltry trailing-12-month price-to-earnings ratio of 6.32, a discount to many of its competitors. There's nothing wrong with American Axle's business as it stands, but if the company is going to convince investors it has a growth story, it might need to make a splash in the driverless-vehicle technology pool.

One great example of an automotive-parts supplier that's doing just that is Delphi Automotive (DLPH), which has recently announced a spin-off of its powertrain division and has intensified its focus on developing driverless-vehicle technology and electronics systems. Further, Delphi recently announced an acquisition of nuTonomy, a leading start-up in driverless technology that will bring in 100 talent-rich employees, including 70 engineers and scientists, to roughly double Delphi's current 100-member autonomous-driving team.

Currently, business is good for American Axle, and it shows in the company's third quarter. But it could continue trading at paltry P/E ratios until it convinces investors it has a vision for the rapidly changing automotive industry -- and so far that remains elusive.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

American Axle & Manufacturing Holdings, Inc. Stock Quote
American Axle & Manufacturing Holdings, Inc.
AXL
$7.21 (6.82%) $0.46
General Motors Company Stock Quote
General Motors Company
GM
$36.00 (1.70%) $0.60
Delphi Technologies PLC Stock Quote
Delphi Technologies PLC
DLPH

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.