Motley Fool
All posts from Motley Fool
Motley Fool in Motley Fool,

Does American Axle's Blockbuster Q3 Make It a Buy Now?

There's plenty of pessimism among Wall Street and Main Street investors about the state of the U.S. auto industry. While sales are currently near all-time highs annually, we're almost certainly at the peak of the cycle, and that means a slowdown ripple effect for companies such as American Axle Manufacturing (NYSE: AXL) is coming. Such is life in a cyclical industry.

But that doesn't mean all hope is lost for long-term investors. Does American Axle's incredible third quarter prove the point? Let's dig in.

By the numbers

Starting from the top, American Axle (AAM) posted revenue of $1.72 billion during the third quarter, which beat analysts' estimates calling for $1.62 billion. American Axle also beat on the bottom line with adjusted earnings per share checking in at $0.86, well above analysts' estimates of $0.64 per share. Comparing those results to the prior-year quarter reveals some explosive growth: Revenue, net income, and free cash flow jumped 70%, 40%, and 61%, respectively, over the prior year.

The strong performance was enough for management to boost its full-year guidance. American Axle now expects full-year revenue to check in between $6.2 billion and $6.25 billion, compared with prior guidance of about $6.1 billion. Management also said adjusted EBITDA is expected to check in at the high end of guidance, about $1.1 billion.

Image source: American Axle.

"AAM's third-quarter performance was highlighted by continued sales growth, business diversification, and cash flow generation as a result of our recent strategic actions and the realization of our new and incremental business backlog," said Chairman and Chief Executive Officer David C. Dauch in a press release.

While the third quarter trounced prior-year results, investors have to remember that much of the performance was fueled by the acquisition of Metaldyne Performance Group (MPG). Nothing wrong with that, as acquisitions can be a great way to expand if done right, and for American Axle, it helps lessen its dependence on General Motors' (NYSE: GM) business. Remember that American Axle remained under General Motors' umbrella until the early 1990s, and the business connection remains a huge part of the company. Not only did the MPG acquisition drive American Axle's total results higher, but the company also did more than $1 billion of non-GM sales, or 59% of total sales -- both quarterly records.

The question remains

Does this strong third quarter, and an acquisition on track to generate $100 million to $120 million of synergies by the first quarter of 2019, make American Axle a buy right now? The market sure isn't convinced, as American Axle trades at a paltry trailing-12-month price-to-earnings ratio of 6.32, a discount to many of its competitors. There's nothing wrong with American Axle's business as it stands, but if the company is going to convince investors it has a growth story, it might need to make a splash in the driverless-vehicle technology pool.

One great example of an automotive-parts supplier that's doing just that is Delphi Automotive (NYSE: DLPH), which has recently announced a spin-off of its powertrain division and has intensified its focus on developing driverless-vehicle technology and electronics systems. Further, Delphi recently announced an acquisition of nuTonomy, a leading start-up in driverless technology that will bring in 100 talent-rich employees, including 70 engineers and scientists, to roughly double Delphi's current 100-member autonomous-driving team.

Currently, business is good for American Axle, and it shows in the company's third quarter. But it could continue trading at paltry P/E ratios until it convinces investors it has a vision for the rapidly changing automotive industry -- and so far that remains elusive.

10 stocks we like better than American Axle & Manufacturing
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and American Axle & Manufacturing wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 6, 2017

Daniel Miller owns shares of General Motors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.