My prior call on Dana (NYSE:DAN) worked out alright for about six to nine months in 2023, but then the outlook for the very profitable off-highway business started to erode, as did the outlook for the EV business. Trends have only gotten more challenging since then, and while there are some bright spots in the outlook for 2025, the shares are nevertheless down about a third since my last update – more or less matching the performance of American Axle (AXL) and outperforming Dowlais (OTCPK:DWLAF) in a market where there aren’t so many comps left after a wave of M&A.
I’m not particularly bullish on many of Dana’s end-markets right now. I think commercial trucks are likely to get worse before they get better (though I think 2025 could be better than expected), and I see most of the off-highway categories weaker in 2025 as well. Light trucks should remain healthy, and I’m still bullish longer term on Dana’s EV efforts. The valuation looks particularly low now, but in a market addicted to “catalysts,” but may be take some time before the market comes back to this name.
Q2 Results – Not Bad Next To Expectations, But Not Great In Absolute Terms
Dana didn’t do much better, or worse, than expected in Q2’24, but management did lower sales growth expectations on weaker demand (particularly in EVs) and margin leverage is going to be a challenge for a couple of quarters despite operational efficiency efforts.
Revenue declined modestly as reported and rose about 1% in organic terms, with EV sales driving about 40% of that. The Light Vehicle Drive business (driveline products largely for Ford (F) and Stellantis (STLA) trucks) saw better than 6% organic growth in the quarter, outgrowing the underlying market. Power Technologies, which is also overwhelmingly light vehicles, grew a similar amount, with all of the growth from EV products.
In the commercial and off-highway operations, Off-Highway Drive and Motion saw an 8% organic revenue decline, while Commercial Vehicle Drive and Motion rose about 2%. In both cases, EV products were actually a drag on organic sales relative to the prior year as new EV launches are getting pushed out.
Gross margin declined 60bp year over year to 9.3%, albeit against a relatively tough comp. Adjusted EBITDA rose slightly, modestly beating expectations, with margin up 10bp to 8.9% despite 80bp drag from EV. By segment, Light Vehicle Drive was up 27% (margin up 120bp to 7.4%) and Power Tech was up 16% (margin up 50bp to 6.6%). Off-Highway was down 11% (margin down 10bp to 15.5%), while Commercial Vehicle was down 18% (margin down 90bp to 4.4%).
With some emerging softness in commercial vehicles and pushouts in EV programs, management lowered revenue guidance for the year. The new outlook calls for just under 3% organic growth at the midpoint (with EV products contributing 60bp) versus the initial outlook for the year of 4.6% organic growth with 230bp contribution from EV projects. Given the margin drag as the company continues to develop and launch EV products, this actually has a positive near-term impact on margins, and management’s EBITDA margin guidance midpoint of 8.55% is 10bp above the initial guide.
Not Many Near-Term Drivers To Celebrate
As far as drivers that can change Dana’s fortunes in a positive way in the near term, I’m not seeing much.
Although I do think 2025 could be better than expected for heavy-duty trucks (and maybe medium-duty as well), orders for Class 8 trucks fell 13% in July after falling 8% in June. Given weakness in trucking markets, I don’t expect a lot of capex on trucks in the near term … but by the same token, trucking companies have been cutting back for a while during this persistent trucking downturn and I think they’re going to need to refresh their fleets at some point. I do see overall economic activity improving in 2025, and that should drive better results in trucking and better demand for trucks.
I also think light truck sales should remain comparatively strong. Trucks and similar vehicles (like Jeeps) have remained more popular than sedans and as they’re some of the most profitable vehicles that automakers produce, there’s incentive to keep that business going. I do have some modest concerns about further pushouts/delays in EV program launches, but I expect light trucks to be a positive driver, though perhaps not to the same extent as in 2024.
Beyond that … the good news gets harder to find. Off-highway is Dana’s most profitable market by far, but agriculture continues to weaken (AGCO (AGCO), CNH Industrial (CNH), and Deere (DE) shares are all down year over year) in the face of high rates and lower grain prices. Construction fleet operators have been pulling back on spending in the face of weak residential and weakening non-residential activity, and I don’t think infrastructure spending will be enough to offset that (Terex (TEX) shares are about flat over the last year).
Last and not least, while I think mining equipment demand will hold up comparatively better given overaged fleets, I think new drilling and hauling equipment will be less of a priority compared to automation systems. That’s not good news for companies like Komatsu (OTCPK:KMTUY) or Epiroc (OTCPK:EPOKY) among others.
I also don’t see much further uplift from price/cost tailwinds. Commodity prices have declined and Dana has seen those benefits as gross margins have improved from the 7%-8% range to around 9%. At the same time, the company continues to develop its electrification capabilities ahead of improving demand in a range of commercial markets, and that’s going to weigh on margins a while longer.
The Outlook
Dana has always been a relatively volatile name; perhaps not so surprising given the cyclical nature of the commercial and off-highway markets, the thin margins, and the heightened sensitivity to operational/overhead leverage. This is in spite of the quality of Dana’s products – Dana’s driveline products are well-respected across the company’s end-markets and the company has secured e-transmission wins in supercar/hypercar models from Aston Martin Lagonda (OTCPK:ARGGY), Ferrari (RACE), McLaren, and Volkswagen’s (OTCPK:VWAGY) Lamborghini.
The aforementioned weakness in off-highway, commercial, and EV markets has led to a roughly 7% drop in my FY’24 revenue estimate versus my earlier expectations, and I’m currently a bit below the Street. I do expect a rebound in 2025, though (up 5.5%, slightly ahead of the Street average) and further 4%+ revenue growth for a couple years thereafter on renewed end-market capex and EV product launches. Long term, I’m expecting around 3% annualized revenue growth against a long-term trailing average closer to 1%.
Despite the weaker top line outlook, I expect a better year for margins and free cash flow generation, with EBITDA margin improving almost a half-point and then another “almost half-point” in FY’25. I believe EBITDA margins will reach 9% within three years and 10% in five years. For free cash flow, I still think long-term FCF margins at the low end of the mid-single-digits (in other words, 4%) is still attainable, but there’s not much to be gained from overly aggressive modeling now and long-term margins in the 2%’s is enough to support double-digit growth from 2024 onward.
Both discounted cash flow and margin/return-driven multiple-based valuation suggest Dana is too cheap. I get to the mid-teens on discounted cash flow, while a 0.45x revenue multiple and 5x EBITDA multiple get me to $19-$20 range and represent not only discounts to long-term averages, but also what the market has historically been willing to pay for the margins/returns (ROIC, et al.) I expect from Dana over the next 12 months.
The Bottom Line
The market seems to want nothing to do with Dana now, and given the weak outlook for many end-markets, I can understand that to a point. I think it may be early to buy these shares, as I don’t think revenue growth is likely to recover for a few quarters, but for patient investors who can afford to be wrong, this is a name to consider as today’s valuation doesn’t reflect the value of the business or its long-term leverage to electrification in professional vehicles.
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