We have been hearing a lot about light trucks and their rising demand due to the housing recovery (light trucks are mostly used to transport construction material). In a recent post of mine, I highlighted how sales of light trucks have helped keep the U.S. auto sales momentum going. However, we have always missed the aspect of light-truck part suppliers. How are they performing? Let’s have a look at some of them.
American Axle & Manufact. Holdings, Inc. (NYSE:AXL) is a leading provider of light vehicle driveline systems, principally to light trucks in North America. The Street sees above-average revenue visibility given its large backlog, low exposure to Europe (3% of sales versus 35% parts supplier average), ongoing sustainable cyclical recovery in North American sales (82% of sales) and production, and the 2013 rollout of all-new versions of General Motors Company (NYSE:GM)’s family of full-size pickups and SUVs in which American Axle & Manufact. Holdings, Inc. (NYSE:AXL) has significant content (58% of sales).
That said, the company faces potential headwinds. There is a lack of significant leverage to secular growth themes. The company is currently in the process of extending its business lines to new geographies, which presents potential execution and margin risk in the near future (though long-term benefits can be substantial if executed properly).
American Axle & Manufact. Holdings, Inc. (NYSE:AXL) has heavily relied upon former parent General Motors Company (NYSE:GM) in North America (73% of sales) over the years. However, it is now set to substantially transform itself over the next several years via new non-General Motors Company (NYSE:GM) business. Its 2012-2014 backlog (highest as a percentage of 2012 sales among the peers) is majority non-General Motors Company (NYSE:GM) and majority non-light truck, and represents an expansion into new products and new geographies. While diversification is the appropriate strategy, it also presents execution challenges.
Another name in this category is Dana Holding Corporation (NYSE:DAN), which also enjoys only modest leverage to secular growth themes. Dana Holding Corporation (NYSE:DAN) supplies driveline components, including axles, to the light and commercial vehicle industries, and the off-highway vehicle market. It also provides a variety of engine components and heat transfer products. JPMorgan Chase & Co. (NYSE:JPM) recommends a neutral position in this stock. JPMorgan Chase & Co. (NYSE:JPM) sees several investment positives (explained below), which the neutral rating balances with below-peer top-line growth and middle-of the-pack earnings growth prospects through 2014.
Though focused growth stories are more preferred, JPMorgan Chase & Co. (NYSE:JPM) looks favorably upon Dana Holding Corporation (NYSE:DAN)’s combined light and commercial vehicle orientation, believing it diversifies end market exposure while not compromising a focus on core competencies. The company’s high aftermarket exposure is also attractive, which tends to be higher profit and lower volatility, although with slower growth. Moreover, Dana Holding Corporation (NYSE:DAN) is expected to grow earnings faster than sales, given management track record of margin improvement through operating efficiencies.
Investors might not like Lear Corporation (NYSE:LEA), the maker of electrical power management systems (EPMS) for the light vehicle industry, for its minimal exposure to secular growth drivers. Many also believe that the company is expected to display below-peer sales and earnings growth. However, I am bullish on the stock.