RBC On American Axle: M&A Might Not Happen

• American Axle & Manufact. Holdings, Inc. AXL shares are down 9 percent year-to-date.
• RBC Capital Markets’ Joseph Spak downgraded the rating on the company from Outperform to Sector Perform, while reducing the price target from $26 to $23.
• While American Axle’s business appears robust in the near term, there are no positive catalysts visible, Spak stated.

The downgrade in rating is mainly on account of the lack of a catalyst, analyst Joseph Spak said. He added, however, there are is potential for some multiple contraction due to:

1. The company being a year further into the US/pickup recovery and
2. Market could penalize companies that are not well positioned for the “vehicle of the future”.

“We also believe the company is weighing acquisition growth to become better positioned to be a supplier to the "vehicle of the future" versus deleveraging. We prefer the latter to create equity value, but can’t be assured that will be the case,” Spak wrote.

While American Axle is weighing inorganic growth, their current leverage position could make pursuing an M&A tricky, since the company would need to ensure that it can delever ahead of the cycle turning, the analyst said.

In the report RBC Capital Markets noted, “As such, we would prefer AXL delever now and better position for the long term (to perhaps take advantage of assets that come available later). We don’t believe management will be reckless, but we are less certain as to how levering up for a deal would be received at this point.”