UBS Downgrades American Axle & Manufacturing Stock to ‘Sell’
Recently, UBS analysts made a historic yet important move, and downgraded American Axle & Manufacturing stock (NYSE:AXL) to a “Sell” rating. This move was taken along with a downward revision of the stock’s price target from $8 to $6.5. With this, there is an expectation of a potential downside of over 10% from the current share price.
The downgrade decision are said to be due to three major factors, highlighted and outlined by analysts. Of three, the first factor which is being considered is the concerns related to the limited EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) growth beyond the year 2023. While acknowledging some improvement in EBITDA post-2023, analysts remain unsure about the potential for significant growth, indicating that EBITDA possibly reached its limit and peak.
Secondly, UBS highlighted the possibility of American Axle facing challenges in a higher capital expenditure (capex) cycle compared to previous years. This could restrict the company’s ability to generate free cash flow (FCF), potentially impacting its financial performance.
Lastly, UBS analysts raised concerns about the perceived overly optimistic outlook for future years, particularly in light of evolving market dynamics. With the gradual displacement of internal combustion engine variants by GM’s electric trucks, American Axle may face headwinds that could limit its growth potential.
The market responded promptly to the UBS downgrade, with AXL stock witnessing a notable decline of 9% on Wednesday following the rating change.
In a note to investors, UBS analysts emphasized and explained their rationale, highlighting the challenges that the American Axle may encounter in sustaining growth beyond the immediate future. They highlighted the strike impact and operational challenges which were in 2023, becoming a major factor contributing to the difficulty in foreseeing meaningful EBITDA growth in subsequent years.
Furthermore, UBS alerted about the market’s forward-looking consensus which appears to be overly ambitious, especially during the shifting landscape in the automotive industry. The potential negative revisions to earnings expectations can be a contraction in the stock’s multiple, as investors reassess their outlook for the company.
Overall, the UBS downgrade underscores the uncertainties surrounding American Axle’s future prospects and the challenges it may face in navigating a rapidly evolving industry landscape. Investors will likely scrutinize the company’s performance closely in the coming quarters to gauge its ability to address these concerns and deliver sustained growth in the long term.
