Tuesday, December 08, 2009

Dana Holding (NYSE:DAN): 2010 Guidance Could Be Strong Catalyst, raising target to $12 - Barclays

Barcalays is out very positive on Dana Holding (NYSE:DAN) raising their target to $12 (prev. $8) and reiterating their Overweight rating.

Ahead of a series of strong potential catalysts for Dana Holdings (DAN) over the next few weeks, they are raising materially their price target to $12 (from $8 previously) and reiterating their 1-OW rating, reflecting the solid earnings outlook the firm expects for the company as it continues to benefit from its deep cost actions and its large leverage to improving volumes in the light and commercial vehicle markets.

Despite having put to rest all liquidity concerns with a very successful secondary offering in September, and even after a significant price outperformance over the past 6 months (up 529% versus only 180% for the next best performing supplier and 17% for the S&P500), DAN continues to trade at the lowest multiple in the group. Indeed, DAN is currently trading at only 4.0x firm's 2010 EBITDA estimate of $500mm and 3.1x their 2011 estimate of $650mm, well below the 6.0x and 4.4x respective averages for the auto supplier group.

Barclays believes this is undeserved in light of DAN’s new solid balance sheet, and its solid outlook for strong earnings growth as light and commercial vehicle volumes recover. In their view, this discount is largely due to a lack of exposure of the fairly recent senior management to investors, and very limited sell-side coverage. Firm visit of Dana headquarters later this week will provide investors an opportunity to spend time with the CEO and the rest of senior management, but more importantly, the strong 2010 guidance they expect management to initiate in an investor call later this month could constitute a meaningful positive catalyst for the stock, in their view.

On Dec. 10, they are indeed taking a very large group of investors to meet with Dana’s senior management at Dana headquarters in Maumee, Ohio. They will perform a deep-dive into Dana’s operations and strategy, and will meet with:

James Sweetnam, CEO
Jim Yost, CFO
Jacqui Dedo, Senior Vice President Strategy & Business Development
Mark Wallace, President Heavy Vehicle Products and Global Operations

More importantly, Dana has indicated several times recently that it intends to issue earnings guidance for 2010 in the very near future, and certainly before the end of the year. While no invitation has been sent as of yet, Barclays believes that Dana management will host a conference call for investors to discuss its detailed outlook for the coming year.

They expect 2010 guidance to be very solid, which could provide a strong catalyst for the stock. While DAN’s ultimate outlook will depend heavily on which production assumptions it will use, which is difficult to predict, the firm believes that the company could easily guide to a 2010 EBITDA of $500mm as this target is likely reachable almost without any help from improving volumes. In practice, they expect volumes to improve next year in most of DAN’s end-market.

Over the next few weeks, some additional potential catalysts for DAN include:

- ArvinMeritor’s NYC annual analyst day on Dec. 15, 2009, where Barclays expects confirmation of ARM’s mid-term guidance of double digit EBITDA margins. ARM is Dana’s main competitors in the very highly concentrated N.A. market for commercial vehicle axles.

- Dana’s investor meetings around the Detroit Auto Show on January 12-14, 2010.

Dana’s CFO has often indicated that he could see DAN’s EBITDA margin expand back to the 10+% range in a more normalized production volume environment. Barclays does not believe that DAN is getting credit from investors for this expected margin reversion, because they understood this comment as referring to long term margins, achievable only when volumes have recovered to peak levels.

They believe that double digit EBITDA margins are achievable much sooner than investors expect, and possibly as early as in 2011. Firm expects management to make this point very clear over time, starting possibly with its 2010 guidance call, which would likely push the Street to raise mid-term estimates meaningfully.

Notablecalls: This is a fairly significant call from Barcalays' Auto Parts team. They are sitting on huge gains following the July 10 upgrade (see archives) but instead of booking profits they seem to have higher conviction than ever.

With another 50% upside to Barclays' target the stock is likely to see further buy interest. They are highlighting potentially significant catalysts in the n-t horizon which should add some fuel to the fire.

Also note that on Dec 1 Soros Fund Management reported a 5%+ stake in Dana. It's always nice to be in good company.

The stock looks to be ready to break to a new 52-week high.

PS: The main risk here is the general market. Futures are in red and I would certainly not be surprised to see futher selling. This may temper any upside in DAN as well today.

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