American Axle & Manufacturing (AXL) (Part 2)
For the third quarter ended Sept. 30, American Axle reported a nearly doubling of net earnings to $38.8 million or 52 cents a share, from $19.6 million or 35 cents a share a year ago, far exceeding the 39 cents that Wall Street was calling for. Net sales rose about 51% to $618.2 million, from $409.6 million, beating the analyst consensus expectation of $570.1 million. Stellar results were driven by strong GMT900 truck production by GM. Johnson from Barclays says in general, better GMT900 production is expected for 2011.
Moody's has a B2 corporate family rating with stable outlook for American Axle. Moody's says the company's operating performance has improved over the past two quarters and believes that this can be sustained in the intermediate term due to stable auto production in North America and cost structure improvements the company completed in 2009. However, the company is largely exposed to SUVs and light trucks at time a time when consumers are becoming increasingly interested in smaller cars at least in the intermediate term.After participating at the company's recent annual dinner for sell-side analysts in New York, Credit Suisse analyst Christopher Ceraso tells clients that the company has a compelling story to tell, but could be facing a more challenging 2011. While American Axle reports the gross figure of $850 million in new business backlog over the next three years, widening customer diversification and a stronger balance sheet, Ceraso thinks risks outweigh rewards in the near term; noting also that benefits from new business don't really kick in until 2012. Ceraso says unless there's surge in customer demand, American Axle faces difficult comparisons for vehicle production in 2011 given that its primary customer restocked inventory in 2010. Ceraso notes that furthermore, American Axle's costs will rise in 2011 in connection with a financing agreement struck earlier. The agreement requires the company to undo what were favorable working capital payment terms, resulting in cash outflow of about 150 million in 2011. The agreement also reduces the company's ability to pass on metals costs as it introduces "price-downs," or costs reductions, for automotive OEM customers for the first time in years. Recently, U.S. automakers have been demanding price cuts from their suppliers as the automakers compete for better margins in a tough competitive environment.
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