Friday, December 18, 2009

Dana Holding (NYSE:DAN): Upgrade to Overweight, price target to $16 - J.P. Morgan

J.P. Morgan is upgrading Dana Holding (NYSE:DAN) to Overweight from Neutral while raising their price target to $16 (prev. $7).

According to the firm their more positive view reflects: 1) improved earnings visibility— DAN has finally provided formal EBITDA guidance (for 2010), which seems conservative but, more importantly, the fact that it was precisely in line with their prior 2010 forecast inspires more confidence in the predictive-ness of their earnings walk through 2012 for this multi-end market company); 2) strategic repositioning improves medium-term revenue visibility (Structural Products unit sale materially reduces DAN’s exposure to US light trucks); and 3) recently fortified balance sheet, which notably reduces balance sheet / covenant risk overhang (e.g., common stock offering, Structural Products sale proceeds), allowing investors to instead turn attention to 4) improving end markets. JPM's new estimates assume a US SAAR and Class 8 build of 12MM/140k in 2010, 13MM/182k in 2011, and 14MM/200k in 2012.

DAN introduced FY10 EBITDA guidance of $500MM, consistent with JPM/consensus. 2010 revenue guidance of +5-10% they found conservative (as management seemed to not aggressively contest on the call); such guidance implies $5.5-5.7B off JPM 2009e revenue base (vs. JPM $6.0B).

Estimates. JPM raises their 2010 group EBITDA from $500MM to $535MM (guidance $500MM), implying an 8.9% EBITDA margin.

Sale of Structural Products division to Metalsa further strategically focuses DAN as a leading supplier of driveline components: DAN recently announced the sale of its Structural Products division (primarily frames for light trucks) to Metalsa for up to $150MM, implying it was sold for a relatively modest 2.6x 2010E EBITDA, but future capex rise avoidance seems to have been a big motivator. Proceeds will be earmarked for debt reduction (term loan at par).

Unlike ARM, sale of Structural Products likely does not suggest desire to transform into a wholly commercial vehicle supplier. JPM notes they sense DAN regards Driveline as core and does so across both light and commercial vehicle categories. Earlier this year when the value investors ascribed to automotive firms reached a record low, DAN announced it would no longer look to actively shop its Sealing, Thermal, and Structural Products divisions (Metalsa reportedly approached DAN in this case). On the call Thursday, mgmt. stressed the integral nature of LV Driveline. Mgmt. noted some recent electric car related wins for the thermal business, and this may be a new growth opportunity, but they still think Sealing/Thermal could be sold if/when M&A multiples improve.

Stock View: JPM values DAN shares at 4.5x EV/EBITDA on newly introduced 2012e JPM EBITDA of $800MM. They had previously utilized a 4.0x multiple on 2010e but believe recent actions to de-risk the business (e.g., strengthening the balance sheet through ~$260MM equity offering and sale of Structural Products for ~$135-150MM) justify taking their valuation out to a longer time horizon and modestly higher multiple (though 4.5x is still below 5.0-5.5x they would generally use for many suppliers, reflecting some market share concerns). In addition, the firm is attracted to the stock given conservative 2010 guidance and the fact that the NA CV market rebound which, unlike the LV market, still appears a few quarters away from starting, could be multi-year in nature (another reason why they look out to 2012 for valuation purposes).

Notablecalls: So now the positive comments start pouring in. Barclays was the early bird in the name upgrading the stock in the low single digits in July and raising their price target to $12 couple of weeks ago in anticipation of good guidance (see archives). Now J.P. Morgan comes out and slaps another Street high target on the name.

This sets the stock up for another s-t pop today. I think DAN will trade over the $10 level (as it did yesterday in reaction to guidance) & will possibly challenge the highs once more. So $10.10-10.20+ is my target level.

After that we are likely to see some profit taking in the name as some market participants are sitting on huge gains & will probably want to lock in some. Over the coming months there will likely be a shift in the shareholder base as new investors come in as other analysts turn more positive on the name.

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