Friday, September 11, 2009

American Axle (NYSE:AXL): Upgraded to Overweight at Barclay's; Actionable Call Alert!

Barclays is out with a major call on American Axle (NYSE:AXL) upgrading the shares to Overweight from Equal-Weight while raising their price target to $13 (prev. $8).

According to the firm the upgrade comes as the recent GM agreement and in their view, a strong likelihood of a bank deal should remove liquidity concerns, enabling investors to focus on AXL's earnings in a recovery, which they view very favorably. Firm is bullish about the prod. outlook for AXL's top platform, the GMT900, and believes the Street materially underestimates demand for full-size trucks in the context of a recovery in SAAR, likely marketing programs focused on large pickups, and a 1Q10 bottoming in construction employment. Benefitting from its large exposure to this segment and its large cost reductions, AXL could expand its EBITDA margin to the 13%+ range in 2010 and nearly 14% by 2011, yielding above-consensus earnings growth.

Barclay's expects AXL to beat the Street as early as this qtr, benefitting from a sharp rebound in pickups post clunkers and shutdowns. This could be a catalyst for the stock to rerate towards a valuation more in line with its peers, which trade at 5-6x 2011 EBITDA. Their new $13 PT is based on a still conservative 4.5x their 2011 EBITDA of $365mm.

Barclays is Bullish About the Outlook for GMT900 Production
Large pickup production is likely to be up materially in the second half of the year, in our view, benefitting from lean inventories and a potential pick up in sales pace. In August, the GMT 900 sales rate reached 810k units, or about 630k units when conservatively adjusted for cash for clunkers boost. While cash for clunkers mainly drove passenger car sales, the DOT reported 46,836 “Category 2” trucks (which includes pickups and large SUVs) were subsidized. Assuming that 85% were sold in August, and that GM had a 40% share, the potential GMT 900 cash for clunkers boost could be about 16k units, or 180k units on an annual run rate.

Several of the largest automakers have signaled in the past couple of weeks that they are seeing signs of improved demand for pickup trucks over the rest of the year.

As for GM, CSM recently raised its total GMT900 (pickup + SUV) production schedule for the rest of 2009 by about 50k units, with the increase taken more than entirely in 3Q, which was boosted from 119k to 174k units, taking its full year 2009 production to 643k units, in line with Barclays' virtually unchanged estimates.

They believe this sharp sequential rebound in pickup production, post clunkers and summer shutdowns, is not currently baked in the Street’s 3Q09 estimates for AXL, which could lead to a material earnings beat this quarter, although they expect continued restructuring costs (most of which will be subsidized by the new GM deal). Looking ahead, however, the firm is significantly more bullish than CSM on the mid- to long-term outlook for GMT900 production. Indeed, their expectation is that GMT900 sales should continue to represent around 6% of the U.S. SAAR going forward, calculated as GM keeping a 40% average share of the full-size pickup segment (which itself represents 11% of the SAAR), and a 65% of the large/luxury SUV segment (which itself represents 2.5% of the SAAR).

Focus Returns to Long-Term Earnings Power
Barclays believe that with its liquidity issues largely behind it, investors will now refocus on AXL’s longer term earnings power. Firm's bullish view on GMT900 production explains largely their well-above-the-Street AXL earnings estimates, and they believe that, as AXL delivers strong earnings, the stock could start rerating towards a trading multiple closer to that of its peers.

Firm expects AXL to beat Street expectations as early as this quarter, benefiting from a sharp sequential rebound in pickup production post clunkers and summer shutdowns. Based on a much stronger 3Q09 GMT900 schedule than previously expected, they now model AXL to generate $49 mil in EBITDA in 3Q09, representing a per share loss of $(0.10). This would represent a meaningful improvement versus the $(1.75) loss generated in 2Q09, and would be well above consensus loss of $(0.43).

More importantly, however, Barclays' earnings estimates for the next few years are well above consensus as well, reflecting the stronger GMT900 production we expect, as well as the material benefits they expect from AXL’s cost actions. They believe that AXL could generate $296mil in EBITDA in 2010, $365 mil in 2011, and 381 mil in 2012, up from just $91 mil expected this year. On an EPS basis, this represents $1.00 in 2010, $1.65 in 2011, and $1.80 in 2012, well above consensus of $0.73 and $1.30 in 2010 and 2011 respectively.

Notablecalls: I'm going to call this one Actionable Call:

- AXL has become quite a little performer. The stock is mover!

- Barclays' new $13 target is the new Street high.

- Barclays now expects AXL to beat the Street numbers on better than expected GMT900 platform sales. Who would have guessed? Really!

- Short interest is STILL sky-high at almost 32%. They need to start thinking about covering. It's death zone now.

- You're going to be in good company as SAC Capital Advisors recently filed a 13-D on AXL.

The stars have aligned, I think. This one is Actionable.

I expect the shares to trade way above the $7 level with $7.70-8.00 not out of the question. We may have another 15-25% upside mover on our hands today.

Good luck.

1 comment:

BiasedBloomberg said...

Thanks for the work on this one.