The initial discovery didn’t work out as planned
I have several sets of stock screening criteria that I run when looking for investment opportunities, and as the markets have soared, the number of stocks that appear in the results of these various screens have fallen dramatically. Over the last few weeks, I have noticed that American Axle & Manufact. Holdings, Inc. (NYSE:AXL) was consistently showing up in one of my value to growth screens and I decided to take a look. American Axle & Manufact. Holdings, Inc. (NYSE:AXL) is a manufacturer of vehicle drivetrain components and should be poised for excellent growth as the global economy improves and building consumer optimism begins to manifest itself in one of our favorite pastimes, buy new cars.
This business is trading at an estimated P/E ratio of only 6.56 times 2014 projected earnings, has a five-year projected annual earnings growth rate of 11.1%, and shows a price to cash flow ratio of only 2.6 on msn MONEY. These initial numbers indicated there could well be a good reason to get excited about this business as an investment opportunity and the anticipation was beginning to build.
Unfortunately, that is about where the good news ended. American Axle & Manufact. Holdings, Inc. (NYSE:AXL) has produced negative cash from operations in the region of $138.7 million over the last five years while spending an additional $789 million in capital expenditures. In order to fund this rather large deficit, the company consumed $281.2 million of their cash on hand, issued $595.9 million in debt, and $135.2 million in new stock since the beginning of 2008. All of this activity has resulted in negative shareholder equity of $107.9 million at the end of 2012. This was bad news and not the result I was hoping to find.
Some good news to follow the bad
One of the important steps in my evaluation of investment opportunities is to make a comparison of the business I am considering to its direct competitors. In addition to providing a good benchmark for the valuation of the business I am evaluating, I have also found several good investment opportunities through this comparison over the years; that was the case in this situation as well.
Dana Holding Corporation (NYSE:DAN) is also a supplier of drivetrains and components for light duty and commercial vehicles, and received the prestigious bronze level 2013 Edison Award in Material Science for its innovative Spicer Diamond Series driveshaft which reduced the weight of this assembly by 40% from the previous version. Not only is Dana Holding Corporation (NYSE:DAN) an innovative company in their new product development, at first glance, the stock appears to be very fairly valued and deserving of a closer look.
To begin, Dana Holding Corporation (NYSE:DAN) pays a dividend producing a current yield of 1.08%. This is only about half of the average of the S&P 500 yield but infinitely better than none from American Axle & Manufact. Holdings, Inc. (NYSE:AXL). The payout ratio to cover the current dividend is a meager 12%, which provides an enormous opportunity for increases going forward. It is proven that businesses initiating and raising dividends tend to outperform the market in regard to share price increases; so, the ability to increase the payout is an important metric for long term investors to consider. The debt to equity level of 0.5 is quite manageable and with interest coverage of 6.6 times, the debt does not appear to be problematic.
At the current price, Dana Holding Corporation (NYSE:DAN) shares are changing hands at a P/E ratio of only 9.6 times 2014 consensus earnings estimates with a forward five-year projected growth rate of 15.4% per year; an exceptionally low valuation for a business just coming into their sweet spot in the business cycle as the auto industry recovers from a near total collapse.
And better news follows the good
Magna International Inc. (USA) (NYSE:MGA) is a business I had never heard of until I identified it as a competitor of American Axle, but that changed quickly. Magna International Inc. (USA) (NYSE:MGA) is a supplier of drivetrains and components to major auto manufacturers around the world but can also supply just about any of the components required to build a complete vehicle. It is a major supplier to General Motors Company (NYSE:GM) and their rapidly growing operations in China where the emerging middle and upper classes seem to be developing a love of automobiles similar to what exists in America. They seem to be fond of the GM brand as well.
Growing sales do not always result in growing profits and the automotive industry has had a very tough five years; however, Magna International Inc. (USA) (NYSE:MGA) has come through the tough times with flying colors. The business carries a debt to equity ratio of a measly 0.04% and has grown its income at an annualized pace of 16.67% for the last half decade. Management has also shown their willingness to reward shareholders with a current dividend yield of 1.93% and an annual five-year growth rate of 13.5% on that dividend amount. The current payout ratio of 18% gives management ample room to continue their habit of dividend increases for years to come.
The current P/E ratio of 9.43 times 2014 estimated earnings coupled with the projected 11.3% annual earnings growth rate for the next five years provides investors who act now an exceptional opportunity for steady double-digit gains for at least the next five years as we move through this economic cycle.
Final thoughts and action
As an investor, it is important for me not to marry an idea until the process is done. Investing in a stock simply because that was my original pick is a very poor decision if my analysis reveals it has competitors that offer far better potential. There are times when investors have to be willing to switch horses in mid-stream in order to place their capital into the best available option. Magna International Inc. (USA) (NYSE:MGA) and Dana Holding Corporation (NYSE:DAN) are excellent investment at the current levels; American Axle & Manufact. Holdings, Inc. (NYSE:AXL) needs more time to prove that the current positive signs can take hold.
The article Driving Home Solid Gains in Automotive originally appeared on Fool.com and is written by Ken McGaha.
Ken McGaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ken is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
