In a sharp contrast to the March and April downtrend, American Axle and Manufacturing Holdings (NYSE:AXL) shares gained 64.6% in May, according to data provided by S&P Global Market Intelligence. The share price increase came on the heels of the company's first-quarter 2020 report. Investors clearly believed the worst of the COVID-19 crisis is behind American Axle and that the company was undervalued.
American Axle reported its first-quarter 2020 earnings on May 8 with adjusted earnings per share (EPS) of $0.20, below the $0.36 for the comparable quarter last year. The company estimated that COVID-19 negatively impacted EPS by approximately $0.33.
Adjusted EPS excluded a large impairment charge of $510 million, leading to a GAAP EPS loss of $4.45 per share. First-quarter revenue of $1.34 billion was down 22.1% year over year due to COVID-19-related impacts of global production shutdowns and lower consumer demand for autos.
CEO David Dauch is planning on a current cash flow break-even scenario for 2020. Adjusted free cash flow in the first quarter of 2020 was more than $83 million, compared to a use of cash of more than $188 million in the first quarter of 2019. Dauch estimates that the company can reach breakeven on adjusted free cash flow if 2020 full-year sales are 25% to 30% lower than forecast at the beginning of the year.
"Assuming we are adjusted free cash flow break even for 2020, our total liquidity at the end of the year would be well over $1 billion of target, which meets our targeted liquidity level," said Dauch.
American Axle is implementing cost cutting across the board to conserve cash. Staffing has been reduced, salaries have been cut, and capital expenditures have been slashed. In fact, capital spending in the first quarter of 2020 was more than $50 million lower than what was spent in the same quarter last year.
The company needs all this and more as it grapples with the automotive industry's screeching halt because of COVID-19. American Axle first started ramping up Chinese production in April; in May, it began customer production again in Europe and North America, which will continue through June.
The wild card is consumer demand. The latest forecasts indicate global auto sales could decline by 22% this year, including U.S. demand contracting by 26.2%. Of course, so far, 2020 has been a year of surprises, so stay tuned.
Although the company presented information on the free cash flow break-even scenario for the year, it withheld full-year 2020 guidance due to COVID-19-related uncertainties.
While expectations for the rest of the year remain up in the air, American Axle is moving forward in electric drivetrain technology. The company won awards from Automotive News for innovation and partnership for front and rear electric drive units featured on the fully electric Jaguar I-PACE. It has also been awarded two commitments from Chinese automakers, a market with huge potential.
While American Axle and Manufacturing is doing an admirable job of adapting to the changed business environment, it's unlikely auto sales and production will achieve the levels from 2019. Most parts of the world are fighting to minimize recessionary realities as the fallout from the coronavirus crisis unfolds. I think conditions for American Axle remain too uncertain to warrant investors' hard-earned cash.