The domestic auto industry is on its death bed. And I’m not just talking about the Big 3. Suppliers are also teetering on the brink. To the extent Detroit fails many dominos will fall.
I recommended American Axle & Manufacturing Holdings Inc. (AXL), a maker of axles, chassis modules, driveshafts, power transfer units and steering units back in July when it fetched about $8 per share. Then, I noted that AXL was suffering as the high price of gasoline led to a sharp decline in sales of trucks and SUVs as General Motors (GM) slashed production of its gas guzzlers.
I foresaw a rebound in AXL shares based on my belief that oil prices could not possibly stay at their mid-summer level. Americans’ thirst for large trucks and SUVs would eventually return to more normal levels. What I did not foresee was a credit induced collapse that crippled Detroit when they were already struggling.
AXL is doing the right things. The company hammered out a new labor contract over the summer that would enable it to save about $300 million while providing flexibility to adjust headcount. They are also diversifying their customer base as the company garnered new orders from Nissan, Renault and Audi.
At the time of my previous article on AXL, analysts were forecasting earnings to be as high as $3.08 per share by 2010.
Although oil prices have declined as predicted, the severity of the credit crisis has crippled AXL. In its third fiscal quarter American Axle’s loss amounted to $440.9 million, or $8.54 per share. The bulk of that was charges and other costs related to work force reductions, plant closings and other restructuring actions.
Absent these charges the company posted a loss of about $43 million, or 83 cents per share. Sales fell to $528.1 million. In the year ago quarter AXL had earnings of 25 cents per share on revenue of $774.3 million.
CEO Richard E. Dauch attributed the third quarter’s results to a need to adjust to a "harsh economic reality." That economic reality may include a worst case scenario whereby sales to GM go completely kaput. I’m hoping Congress can provide some sort of remedy—even a pre-packaged bankruptcy for that firm would be helpful for AXL as it could still ship product even if contracts have to be restructured.
Non-GM sales rose to 26 percent of total company sales, up from 24 percent a year ago so headway is being made but not nearly fast enough.
AXL shares fell below $1 per share on all of the bad news. Its fate would appear to be in the hands of the government. The situation is bleak to say the least. Owning shares at this point is highly speculative.
Shareholder value is likely to be completely wiped out if GM fails. If GM survives, AXL would benefit as well. It seems to be an all or none roll of the dice at this point. I’d stay away and move on to something that has a more legitimate shot at survival.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
