Barclays Downgrades American Axle On Contract Overhang

June 8, 2015

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In a report published Monday, Barclays analyst Brian A. Johnson downgraded the rating on American Axle & Manufact. Holdings, Inc. (NYSE: AXL) from Overweight to Equal Weight. The price target was lowered from $30 to $25. The stock is expected to remain range bond in the near- to mid-term due to uncertainties surrounding business from General Motors Company (NYSE: GM).

“Ongoing contract negotiations for AXL’s largest customer program will remain an overhang on the stock until negotiations conclude in ~6-12 months,” Johnson said, while explaining that if American Axle remained the sole supplier for General Motors, there could be some upside to the stock, while a loss of 20 percent or more of the contract could lead to downside risk.

According to the Barclays report, “While we still see potential for upward earnings revisions in the near/mid-term, in our view, the potential for a major negative catalyst within the next 12 months outweighs the upside potential from upward earnings revisions. Moreover, with margins likely to peak in 2015 and incremental ROIC stalling in 2016, the path to upside will become tougher the longer the contract negotiations continue.”

General Motors’ large pickup and SUV program is currently up for bidding. So far, it has accounted for 55 to 60 percent of American Axle’s revenue. While the analyst believes that American Axle is unlikely to be completely displaced during bidding, there are chances that the company would lose some of its business.

“While AXL would have the ability to redeploy the assets to other programs (programs already in the backlog or new business opportunities), the transition would bring heightened execution risk,” Johnson stated.

In addition, the analyst expects the company’s EBITDA to peak in 2015, and decline from 2016 onwards. There also are concerns regarding margin decline 2016 onwards, especially if the company diversifies into lower volume contracts.

“While AXL’s respectable ROIC is likely to remain stable into ‘16, we see limited potential for improvement beyond current levels. While we appreciate AXL’s ongoing diversification and ability to maintain a strong free cash flow profile… incremental ROIC and operating margin expansion are the only metrics that seem to have any relationship between TSR and higher multiples,” the Barclays report concluded.