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American Axle & Manufacturing Holdings, Inc. (NYSE:AXL) announced agreements to develop high-performance hybrid-electric systems and electric vehicle components with large players. The company appears to have a lot of expertise in research and development, and already announced the potential to scale its operations easily. Even taking into account potential supply chain issues or risks from the total amount of debt, I believe that the stock is undervalued.

American Axle is a premier supplier company for automotive manufacturing companies including designers and engineering companies. It is worth noting that American Axle is involved in the technological developments for electric or hybrid cars, which are currently delivering substantial business growth.

Source: Investor Presentation

Axle is one of the suppliers of materials and components for General Motors (GM) for the development of its line of tractors, electric cars, and rotation axes for these vehicles as well as its metal adaptation section. Sales to General Motors represented 40% of total revenue for the company in 2022.

Another big buyer of the products of the company is Stellantis N.V (STLA) for its heavy-duty vehicle program and Chrysler Pacifica. American Axle also supplies some of its products of worked metals. According to the last annual report, the sale to Stellantis was 18% of the total share of revenue.

In addition to these two large customer companies, American Axle markets its products to Ford Motor Company (F) for drivelines in selected products such as the Bronco Sport, Maverick, Edge, Escape, and Lincoln Nautilus along with other products in their malleable metals area. Sales to Ford represented 12% of the total revenue in the last year.

If the name of the company's clients is not enough to justify having a look at American Axle Manufacturing, let's mention the total market opportunity. Management announced, in a recent presentation, a total market of $20 billion by 2030. Management believes that it is in a good position to profit from the growth of the global electric-beam market.

Source: Investor Presentation

As of December 31, 2022, the company reported cash worth $511.5 million, accounts receivable of $820.2 million, and inventories of close to $463.9 million. Prepaid expenses stood at $197.8 million with total current assets worth $1.99 billion. AXL's current amount of assets is significantly higher than the current amount of liabilities, so I wouldn't expect liquidity issues any time soon.

Property stands at $1.903 billion with tax-deferred income of $119 million, goodwill of $181.6 million, and other intangible assets of $616.2 million. GM postretirement cost sharing assets were valued at $127.6 million with an operating lease right of use assets of $107.2 million. Finally, total assets stood at $5.46 billion.

Source: 10-k

AXL's liabilities include a current portion of long term debt of $75.9 million in addition to accounts payable of $734 million, accrued compensation and benefits of $186.6 million, and deferred revenue of $28.1 million. Finally, with accrued expenses of $153.6 million, the total current liabilities are equal to $1.199 billion.

AXL's long-term liabilities include long-term debt of around $2.845 billion, deferred revenue of $73.4 million, and a deferred income tax of $10.7 million. Beside, with a long-term portion of operating lease liabilities of $87.2 million, long-term liabilities stand at $4.842 billion.

Source: 10-k

The company's total amount of debt is not small, so let's include the senior debt maturities reported by American Axle Manufacturing. The company will have to pay more than $900 million in 2027, $400 million in 2028, and $1.235 billion in 2029. Market estimates include 2023 EBITDA of more than $700 million, so I believe that AXL will be able to pay or renegotiate its debt.

It is also worth noting that management has close to 4-5 years to find debt investors as well as to generate FCF to pay its debts. I don't expect that most investment advisors out there would be afraid of American Axle's total amount of debt.

Source: Investor Presentation

I believe that other financial analysts delivered beneficial expectations for American Axle Manufacturing. Market estimates for 2025 include net sales of $6.090 billion, sales growth of -0.96%, 2025 EBITDA of $829 million, and an EBITDA margin of 13.61%. 2025 operating profit would be $363 million with 2025 operating margin of 5.96% and a net income of $165 million. Finally, 2025 free cash flow would stand at close to $379 million accompanied by a FCF margin of 6.22%.

Source: S&P

The company's financial expectations for 2023 are also quite beneficial. Full year sales would be $5.95-$6.25 billion along with adjusted EBITDA close to $725-$800 million and adjusted FCF around $225-$300 million.

In my view, management appears a bit less optimistic than financial advisors out there for 2023. With that, everybody appears to expect sales growth and FCF generation.

Source: Investor Presentation

American Axle Manufacturing sells transmission systems for automobiles, which are logically a fundamental piece in the operation of the vehicle. For each new design, the transmission system deserves a special and specific development. As the industry changes, in my view, Axle will most likely generate new contracts or find a way to develop new products to take advantage of the growing demand in this sector. As a result, I believe that management will enjoy the growth of the electric vehicle industry.

In my view, the recent agreements with Mercedes (OTCPK:MBGAF), NIO (NIO), EKA, and Chery Automobile for product development indicate that American Axle may be finding demand as the market grows.

Regarding its international expansion, Axle began to participate in the European convention for excellence, offering developments and sharing research. The company also has commercial alliances with large manufacturers in the Asian sector, such as Liuzhou Willing and Hefei Automobile, building value relationships with leaders in the Chinese market. In my view, further international efforts, mainly in Asia, where the electric vehicle growth is significant, will likely bring revenue growth.

Besides, I am quite optimistic about the company's R&D activities because American Axle already brought a significant amount of innovations to the market. The same engineers who offered better electronic controls and lower emissions in the past will likely design new innovations for the electric vehicle market. In this regard, I believe that investors may want to have a look at the following lines from the annual report.

I used a DCF model including financial figures from 2023 to 2032. What I show below is mainly the cash flow statement.

My forecast for 2032 includes net income of $283.5 million, a depreciation and amortization of $227 million, and a deferred income tax of -$21 million. I also estimated stock based compensation of $10 million accompanied by pensions and other postretirement benefits of -$97 million.

Source: Internal Estimates

I also added 2032 debt refinancing and redemption cost of -$85 million, changes in accounts receivable of -$98 million, changes in inventories of -$38 million, and changes in accounts payable and accrued expenses of $394 million. Finally, the cash provided by operating activities would stand at $236 million.

Source: Internal Estimates

With my previous assumptions, 2032 CFO of $236 million, and a capex of $25 million, the 2032 FCF would stand at $261 million. If we use a WACC of 9%, the NPV of future FCF would be $1.296 million.

If we also assume a terminal value of $6.528 billion with an EV/FCF of 25x, the NPV of future FCF would be $2.758 billion. I also obtained an enterprise value of $4.054 billion with an equity valuation of $1.72 billion. Finally, the implied target price would be $15 per share.

Source: Internal Estimates

Other small producers at the regional level are joining the traditional competitors of the automotive industry, mainly companies that supply components and systems for electric cars. In the same way, some of the historical competitors are generating alliances with technology companies to develop products in this sense, aimed at meeting the demand for electrification of the global automobile fleet.

In my view, competition could harm the company's FCF margins in the near future. If the company's technology is not demanded in the electric industry due to competitors, revenue growth may not be as large as expected.

Axle pointed out in its annual report the complications in supply chain compliance that the auto manufacturing industry has experienced in the last year, mainly since the war in Ukraine, and the increase in prices for transportation. Further supply chain issues could arise if the tension with Russia increases.

The company also suffers from client concentration risks. Although these relationships are projected to strengthen in the long term, the company's lack of diversification is undoubtedly a risk to take into account. If one large client decides to lower the amount of work with American Axle Manufacturing, revenue growth would diminish drastically.

Besides, a large number of its products and manufacturing come from the company's facility in Guanajuato, Mexico. It is a risk. Any legal complications or restrictions on the movement of components and exports in this country could complicate the company's operations.

American Axle Manufacturing recently announced contracts with Mercedes-AMG and NIO to develop high-performance hybrid-electric systems and electric vehicle components. Considering the expected growth of the electric industry and the company' expertise in the auto industry, we could expect significant revenue growth from American Axle. Even considering risks from supply chain issues or concentration of clients, in my view, the company appears undervalued.