American Axle also surpassed the Zacks Consensus Estimate of 11 cents per share for the quarter. The company has achieved transformational improvements in its cost structure, operating flexibility and capacity utilization.

Net sales in the quarter slipped 8% to $464 million, driven by lower production volumes (7%) for the North American light truck and SUV programs that the company currently supports for GM and Chrysler due to lower production of mid-sized light truck programs.

Annual Results

In 2009, American Axle reported a narrower loss of $66 million or $1.25 per share (before special items), compared to $214.6 million or $4.63 per share in 2008.

Net sales dipped 25% to $1.5 billion, driven by lower production volumes (30%) for the North American light truck and SUV programs that the company currently supports for GM and Chrysler due to their extended production shutdowns on account of their bankruptcies. The company has estimated the reduction in sales and operating income resulting from these shutdowns to be approximately $304 million and $95 million, respectively

However, American Axle’s content-per-vehicle (measured by the dollar value of its product sales supporting GM’s North American light truck and SUV programs and Chrysler’s Heavy Duty Dodge Ram pickup trucks) in 2009 increased to $1,403 from $1,391 in 2008.

Financial Position

American Axle had cash and cash equivalents of $178.1 million as of December 31, 2009, compared to $198.8 million as on December 31, 2008. Long-term debt amounted to $1.07 billion as of December 31, 2009, reflecting a debt-to-equity ratio of 1.9.

In 2009, American Axle had a net cash flow of $17.3 million from operating activities in sharp contrast to an outflow of $163.1 million in 2008. Meanwhile, capital expenditures remained almost flat at $141.5 million in the year.

Outlook

For 2010, American Axle anticipates sales in the range of $1.9–$2.1 billion, representing an annual sales growth of approximately 25%–40% on a year-over-year basis. This is based on the assumption that the Seasonally Adjusted Annual Rate of light vehicle sales in the U.S. increases from 10.4 million vehicle units in 2009 to a range of 11.0 million–11.5 million vehicles in 2010. Based on the sales projection, the company expects to be profitable for the year and generate positive free cash flow assuming capital spending in the range of 4%–5% of sales.

Zacks Investment Research

(AXL) American Axle and Manufacturing Swings to Profit

American Axle expects sales of $1.5 billion in 2009, close to the Zacks Consensus Estimate of $1.54 billion. The news prompted the share price to rise more than 7% after the market closed on Wednesday (and pulled back 2% today).

American Axle had posted a net loss of 18 cents (before special items) in the third quarter of the year. This was better than the Zacks Consensus Estimate of a loss of 37 cents per share.

Net sales dipped 22% to $409.6 million in the quarter. However, in absolute terms, it was the highest quarterly sales of 2009. The lower sales were on the back of an 18% decline in customer production volumes for the North American light truck and sport utility vehicle (SUV) programs that the company currently supports for GM and Chrysler.

American Axle is a Detroit-based company and a leader in the supply of driveline systems, modules and components for the light vehicle market. The company manufactures axles, driveshafts and chassis components for light trucks, SUVs and passenger cars.

On account of its strong reliance on General Motors and Chrysler, American Axle has been hit hard by their bankruptcies. We continue to recommend the shares of the company as Neutral.

Zacks Investment Research

(AXL) American Axle and Manufacturing Expects Profit

The recent economic crisis has provided an impetus to a massive structural change in the auto industry, setting the stage for growth over the next decade. Given the high barriers to entry and need for scale economies (in operations, supply chain and marketing), the global auto industry landscape is expected to be ruled by global automakers and suppliers based in the six major auto markets of China, India, Japan, Korea, Western Europe and the U.S.

OPPORTUNITIES

To remain competitive, automakers will need to design vehicles that will meet the requirements of consumers in both mature and emerging markets. Automakers will focus on more user-friendly and low-cost vehicles that are also the most advanced technologically.

The automakers will continue to shift their production facilities from high-cost regions such as North America and the European Union to lower-cost regions such as China, India and South America. For example, Greater China and South America is projected to represent more than 50% of growth in global light vehicle production in the auto industry from 2008 to 2015.

There are two underlying factors behind this location shift in the auto industry. The first is the cost factor. The cost of labor in emerging auto markets continues to be a fraction of that in the developed world. The second is the demand factor. Many low cost regions, including the emerging auto markets, have high potential for growth. Thus, the shift in auto industry production facilities will lead to a localization of the manufacturing base that will bring down transportation costs. The emergence of trading blocs is also giving this process a push in the auto market. It is likely that over time there will be fewer car imports from outside a trade zone.

Further, automakers have started to reduce the number of technological platforms with a greater diversity of models produced from each platform in order to remain cost competitive in the auto industry. For example, Honda, with its flexible common platform, has developed three dimensionally distinct versions of the Accord, allowing for designs where 60% of the components are common. Ford aims to build 680,000 vehicles per core global platform within five years, up from current levels of 345,000 units. After emerging from its bankruptcy, General Motors has started focusing solely on four core brands – Chevrolet, Cadillac, Buick and GMC.

Higher fuel prices and concerns over global warming have pooled attention on the auto industry that either rely less on traditional fossil fuels or use renewable sources of less expensive energy. Thus, “green” alternatives such as fuel-efficient electric vehicles (EVs) and hybrids will attract consumers in the wealthier countries while flex-fuels such as ethanol and natural gas will be highly sought-after in the emerging auto markets where the local climate or resource base favors their usage by automakers over petroleum.

Consequently, there will be a variety of powertrain technologies in the auto industry by the next decade. It is likely that “green” cars will represent up to a third of total global sales in developed auto markets and up to 20% in urban areas of emerging auto markets by 2020. Some of the “green” cars have already generated a huge response in the auto industry. These include the Ford Focus, GM Volt, Daimler (DAI) Smart, Nissan Leaf and Toyota Prius.

The role of governments must not be overlooked. Governments in all major countries have become active auto industry players. Their investments through emergency loans and incentive packages, such as “Cash for Clunkers” in the U.S., are a good example of this. Moreover, governments’ energy and environmental policies will be highly responsible in molding the auto industry in the coming years.

WEAKNESSES

Although automakers continue to focus on shifting their production facilities to new regions driven by cost and demand factors, developing the supplier networks remains one of the greatest challenges they face in the auto industry. Existing suppliers to automakers often lack the financial background to expand capacity in new markets. On the other hand, auto market suppliers are sensitive to technology transfers to local third parties, which may result in new and lower-cost competitors.

The financial condition of the majority of auto market suppliers continues to deteriorate, resulting from historically weak demand and higher dependence on automakers. According to the Original Equipment Suppliers Association (OESA), 13 major U.S. direct auto market suppliers and 2 indirect auto industry suppliers have filed for Chapter 11 bankruptcy or have had their assets foreclosed on, while many others in the auto industry have simply liquidated in the first half of 2009. They include prominent components auto market suppliers such as Visteon and Lear , who cater to General Motors and Ford.

According to OESA, 12% of the auto industry suppliers do not have sufficient working capital to support a 10%–25% expansion in production. Thus, despite the government’s sizable investment in the automakers, it is likely that there will be auto market suppliers who are unable to restart operations as automaker production resumes due to working capital shortfalls.

Higher dependence on automakers makes the auto market suppliers vulnerable to several maladies, primarily pricing pressure and production cuts. Pricing pressure from automakers is constricting auto market suppliers’ margins. On the other hand, production cuts by automakers driven by frequent market adjustments are negatively affecting their operations. Some of the auto industry suppliers who have a high reliance on a few automakers such as General Motors, Ford, Chrysler and Volkswagen include American Axle and Manufacturing (AXL), ArvinMeritor (ARM), Goodyear Tire and Rubber (GT), Magna International (MGA), Superior Industries (SUP), Tenneco (TEN) and TRW Automotive (TRW).

The shift in auto market consumer preferences towards hi-tech, fuel-efficient, environment-friendly vehicles, such as small cars/hybrids/EVs, is another issue. Auto market suppliers are expected to quickly adapt to the new technologies by investing in research and development, putting heavy capital burdens on them.

The automakers also face significant challenges in transforming the existing powertrain technologies into the new versions as far as marketability is concerned. As the number of technology applications increases, automakers and suppliers will need to be selective. Their criteria for choosing what to include and what not to will depend entirely on what the customers are willing to pay for.

Zacks Investment Research

(TM) Auto Industry Outlook for 2010 – Industry Outlook

The recent economic crisis has provided an impetus to a massive structural change in the auto industry, setting the stage for growth over the next decade. Given the high barriers to entry and need for scale economies (in operations, supply chain and marketing), the global auto industry landscape is expected to be ruled by global automakers and suppliers based in the six major auto markets of China, India, Japan, Korea, Western Europe and the U.S.

OPPORTUNITIES

To remain competitive, automakers will need to design vehicles that will meet the requirements of consumers in both mature and emerging markets. Automakers will focus on more user-friendly and low-cost vehicles that are also the most advanced technologically.

The automakers will continue to shift their production facilities from high-cost regions such as North America and the European Union to lower-cost regions such as China, India and South America. For example, Greater China and South America is projected to represent more than 50% of growth in global light vehicle production in the auto industry from 2008 to 2015.

There are two underlying factors behind this location shift in the auto industry. The first is the cost factor. The cost of labor in emerging auto markets continues to be a fraction of that in the developed world. The second is the demand factor. Many low cost regions, including the emerging auto markets, have high potential for growth. Thus, the shift in auto industry production facilities will lead to a localization of the manufacturing base that will bring down transportation costs. The emergence of trading blocs is also giving this process a push in the auto market. It is likely that over time there will be fewer car imports from outside a trade zone.

Further, automakers have started to reduce the number of technological platforms with a greater diversity of models produced from each platform in order to remain cost competitive in the auto industry. For example, Honda, with its flexible common platform, has developed three dimensionally distinct versions of the Accord, allowing for designs where 60% of the components are common. Ford aims to build 680,000 vehicles per core global platform within five years, up from current levels of 345,000 units. After emerging from its bankruptcy, General Motors has started focusing solely on four core brands – Chevrolet, Cadillac, Buick and GMC.

Higher fuel prices and concerns over global warming have pooled attention on the auto industry that either rely less on traditional fossil fuels or use renewable sources of less expensive energy. Thus, “green” alternatives such as fuel-efficient electric vehicles (EVs) and hybrids will attract consumers in the wealthier countries while flex-fuels such as ethanol and natural gas will be highly sought-after in the emerging auto markets where the local climate or resource base favors their usage by automakers over petroleum.

Consequently, there will be a variety of powertrain technologies in the auto industry by the next decade. It is likely that “green” cars will represent up to a third of total global sales in developed auto markets and up to 20% in urban areas of emerging auto markets by 2020. Some of the “green” cars have already generated a huge response in the auto industry. These include the Ford Focus, GM Volt, Daimler (DAI) Smart, Nissan Leaf and Toyota Prius.

The role of governments must not be overlooked. Governments in all major countries have become active auto industry players. Their investments through emergency loans and incentive packages, such as “Cash for Clunkers” in the U.S., are a good example of this. Moreover, governments’ energy and environmental policies will be highly responsible in molding the auto industry in the coming years.

WEAKNESSES

Although automakers continue to focus on shifting their production facilities to new regions driven by cost and demand factors, developing the supplier networks remains one of the greatest challenges they face in the auto industry. Existing suppliers to automakers often lack the financial background to expand capacity in new markets. On the other hand, auto market suppliers are sensitive to technology transfers to local third parties, which may result in new and lower-cost competitors.

The financial condition of the majority of auto market suppliers continues to deteriorate, resulting from historically weak demand and higher dependence on automakers. According to the Original Equipment Suppliers Association (OESA), 13 major U.S. direct auto market suppliers and 2 indirect auto industry suppliers have filed for Chapter 11 bankruptcy or have had their assets foreclosed on, while many others in the auto industry have simply liquidated in the first half of 2009. They include prominent components auto market suppliers such as Visteon and Lear , who cater to General Motors and Ford.

According to OESA, 12% of the auto industry suppliers do not have sufficient working capital to support a 10%–25% expansion in production. Thus, despite the government’s sizable investment in the automakers, it is likely that there will be auto market suppliers who are unable to restart operations as automaker production resumes due to working capital shortfalls.

Higher dependence on automakers makes the auto market suppliers vulnerable to several maladies, primarily pricing pressure and production cuts. Pricing pressure from automakers is constricting auto market suppliers’ margins. On the other hand, production cuts by automakers driven by frequent market adjustments are negatively affecting their operations. Some of the auto industry suppliers who have a high reliance on a few automakers such as General Motors, Ford, Chrysler and Volkswagen include American Axle and Manufacturing (AXL), ArvinMeritor (ARM), Goodyear Tire and Rubber (GT), Magna International (MGA), Superior Industries (SUP), Tenneco (TEN) and TRW Automotive (TRW).

The shift in auto market consumer preferences towards hi-tech, fuel-efficient, environment-friendly vehicles, such as small cars/hybrids/EVs, is another issue. Auto market suppliers are expected to quickly adapt to the new technologies by investing in research and development, putting heavy capital burdens on them.

The automakers also face significant challenges in transforming the existing powertrain technologies into the new versions as far as marketability is concerned. As the number of technology applications increases, automakers and suppliers will need to be selective. Their criteria for choosing what to include and what not to will depend entirely on what the customers are willing to pay for.

Zacks Investment Research

(TM) Auto Industry Outlook – Dec. 09 – Industry Outlook

Net sales dipped 22% to $409.6 million. However, in absolute terms, it is the highest quarterly sales of the year. The lower sales were on the back of a 18% decline in customer production volumes for the North American light truck and sport utility vehicle (SUV) programs that American Axle currently supports for GM and Chrysler.

American Axle’s content-per-vehicle (measured by the dollar value of its product sales supporting GM’s North American light truck and SUV programs and Chrysler’s Heavy Duty Dodge Ram pickup trucks) fell to $1,396 from $1,453 in the third quarter of 2008. Non-GM sales constituted 18.3% of total sales in the reported quarter. The company’s non-GM sales stood at 21.6% of total sales on a year-to-date basis.

American Axle had cash and cash equivalents of $173 million as of Sept. 30, 2009, compared to $198.8 million as of Dec. 31, 2008. Long-term debt amounted to $1.18 billion as of Sept. 30, 2009.

In the first nine months of 2009, American Axle had a net cash outflow from operating activities of $19.7 million, an improvement of $77.6 million from the prior-year period. Meanwhile, capital expenditures increased to $115.5 million from $102.8 million in the year-ago period.

American Axle is a Detroit, Michigan-based company and a leader in the supply of driveline systems, modules and components for the light vehicle market. The company manufactures axles, driveshafts and chassis components for light trucks, SUVs and passenger cars. It was hit badly by the bankruptcies of General Motors and Chrysler due its high reliance on these companies. We continue to recommend the shares of the company as Neutral.

Zacks Investment Research
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(AXL) American Axle Reports Better than Expected Results

Fitch expects American Axle to finalize an agreement with General Motors (GM), which will bring a one-time payment of $110 million from GM, who will also offer a $100 million term loan, extending through 2013. In return, American Axle will offer GM up to 19.9% of its equity as warrants. The company does not have any debt maturities until its $250 million term loan is due in 2012. However, Fitch does not expect American Axle to generate free cash flow in 2009. The company needs to make a $20 million contribution to pension plan, which remained underfunded by $255 million in 2008. The company also needs to make a $15 million contribution to its retirement plan in 2009.

Fitch expects ArvinMeritor to continue to face difficulties in selling its remaining assets in the light-vehicle segment. The company may also seek a debt covenant relief for the quarter ending Sept 30. Fitch expects ARM’s operating losses and restructuring costs to result in negative cash flows for 2009. ArvinMeritor has no debt maturities until 2011 and the company’s pension is moderately (7%) underfunded. Fitch expects the underfunded status to increase, which could require incremental contributions over the next several years.

Fitch believes that a diverse product offering and geographic distribution should help Tenneco survive the ongoing recession. Like peers, Tenneco was also impacted by the extended production disruptions. However, with the production restarts at the automakers and Tenneco’s restructuring efforts, profits should improve in the second half of 2009. The company does not have any significant debt maturities until 2012 when $700 million of the $830 million of the credit facility expires. Tenneco has a $249 million underfunded pension plan, which is likely to require incremental contributions over the near term.

Fitch’s ratings revision on TRW Automotive reflects improved operating performance, the recent equity issuance, a credit agreement amendment and significant liquidity. TRW recently raised equity and net proceeds were $269 million. One-third of the net proceeds was used to reduce the term loans while the balance was used to lower borrowings on the revolving credit facility. The company has no near-term debt maturities and the revolver extends through 2012. However, the agency expects negative cash flow in 2009.

Fitch had initiated the Rating Watch on Dec 11, 2008 on fears of possible bankruptcies of GM and Chrysler. Following the bankruptcies of the two automakers, the Rating Watch remained in effect due to apprehensions about lower volumes post-bankruptcy.

Fitch expects the global automotive environment to remain challenging in the near term with sales in Europe declining considerably in 2010. However, sales in North America are expected to improve in the second half of 2009 and 2010 on the back of the government’s Cash for Clunkers program, which is nearly completed, aggressive vehicle pricing, consumer access to vehicle financing which was difficult to obtain in the early 2009 and a reduction in dealer inventories. The parts suppliers should also benefit from the significant restructuring actions taken before and during the global automotive slump. With higher production volumes, auto suppliers will be using cash for working capital needs in the second half of the year and Fitch expects most suppliers should have adequate liquidity while production increases.

Zacks Investment Research
View original at: Zacks.com News Feed

(AXL) Fitch Ratings Upgrades Auto Parts Suppliers

The auto industry is on the verge of significant changes.

CHRYSLER

Chrysler filed for bankruptcy as debt holders rejected an offer to take a 15% stake in the restructured company. The Treasury reached a deal earlier this week with four banks that hold the majority of Chrysler’s debt in return for $2 billion in cash. However, 40 hedge funds that hold roughly 30 percent of that debt also needed to sign on for the deal to go through.

The Treasury Department and the four banks tried to persuade the hedge funds to take a sweetened deal of $2.25 billion in cash. However, the deal ultimately fell through.

An announcement of a merger with Fiat was made. Facilities will be temporarily shut until the deal is consummated. The deal is likely to be completed.

The US Government will give $8 billion of liquidity to finance the company through the bankruptcy, which may take as little as 60 days. Post-bankruptcy, the UAW will own 55% and the US Government will own 8%. Fiat would own 20% of the company, and this could increase to 35% of targets are met and could even be 16% higher if the US Government loans are repaid.

GM

General Motors Corp. (GM) is requiring its bondholders to exchange all of their debt in exchange for 10 percent in the restructured company, which the bondholders are rejecting at this point. Even though the bonds are trading at 10 cents on the dollar, this offer is worth 5-10 cents on the dollar.

GM is requiring 90 percent participation, which is unlikely. (the UAW VEBA will get 50% in the restructured company and a 40% recovery on its $20 billion claim and the US Government owns 50% in the restructured company for $15.4 billion).

Therefore, GM is likely to file and restructure in bankruptcy and lose significant market share (it may stabilize at 18%). Capacity and models to be taken out may help to reduce the 20% industry overcapacity. Pontiac, Hummer, Saab and Saturn are likely to disappear.

WINNERS/LOSERS

Ford Motor Co. (F) is likely to be a major beneficiary. They have restructured their debt and have a decent shot of staying out of bankruptcy. They are likely to increase market share at GM and Chrysler’s expense.

Pricing is likely to improve as 20% industry-wide overcapacity is eliminated. $3 billion of costs will be taken out in 2009. Each 1% increase in market share is nearly $1 billion to pre-tax earnings in the absence of improved pricing.

However, this may result in lower demand for US auto suppliers. Magna International (MGA), American Axle and Manufacturing (AXL) and Lear Corp. (LEA) have high exposure to GM and Chrysler.

Zacks Investment Research
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(GM) Automotive Industry – Industry Outlook

The industry is very concentrated, with the top 8 global auto companies having more than 90% of global revenues and the top 50 global auto parts companies having 80% of global revenues (the top 4 US tire producers have 75% of the US market). There is a focus on automation and simplifying product lines to lower costs and benefit from economies of scale. The average car now needs only 15-25 man-hours per vehicle and this drops 2% annually.

Hybrid/alternative cars represent a source of growth in the future. Market share gains by hybrids/alternatives will be slow, and they are now only 4% of cars on the road. The automakers have been receiving TARP funding from the Treasury to cover cash burn issues. The exact amount continues to be a moving target.

WEAKNESSES

Earnings are below expectations and have been for some time. Some of these companies are nationalization candidates, which would leave equity holders with no value. Demand for autos is down (15-20)% due to a weak economy and weakening real estate market. Demand is also hurt by weakening employment.The recent credit crunch is crippling to auto sales, and this has a trickle-down effect throughout the industry.

Furthermore, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, as they tend to have better gas mileage. Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US by US producers. The presence of unions has led to costs being much higher than seen in other countries.

Pricing averages (2)% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.

Our Sell-rated names in this space have been and continue to be plentiful: Autoliv, Inc. (ALV), AutoNation, Inc. (AN), American Axle and Manufacturing (AXL), Ford Motor Company (F), General Motors Corp. (GM), CarMax, Inc. (KMX), Lear Corp. (LEA), TRW Automotive (TRW) and Visteon (VSTN).

Zacks Investment Research
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(ALV) Auto Industry – Industry Outlook