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Shares of Dana Incorporated (NYSE:DAN) have seen tough times as of recent, even as the company sees incremental improvements in 2024. While this is to be applauded, the transition is long and difficult, creating a tough investor proposition, despite low adjusted earnings multiples seen here.
A Vehicle Component Supplier
Founded in 1904, Dana has grown to become a diversified supplier of axles, driveshafts, gearboxes, e-motors, power electronics and thermal management, among others products.
Like its customers, which include light-vehicle manufacturers, commercial vehicles manufacturers and off-highway manufacturers, electrification is key and this disrupts the business and product line-up as well. That shift in itself presents a massive undertaking, but the hiccups along the way make it a hard and long term transition.
The company is a true giant, with over 40,000 workers generating over $10 billion in sales in 2022, with the operations spanning nearly 90 facilities across 30 countries, with customers all over the globe incorporating its products.
About The Performance
By mid-February, Dana reported its 2023 results, a year in which revenues grew by 4% to $10.6 billion, with adjusted EBITDA of $845 million working down to margins of 8% of sales, as margins were up just over a percent from 2022, a year heavily impacted by inflation.
These revenues are categorized across four divisions, of which light vehicle is the largest with a $4.0 billion revenue contribution, yet EBITDA margins come in the low 5%. Off-highway is the largest business with $3.2 billion in sales, but moreover the most profitable, with margins posted near 15%.
The commercial vehicle business generated $2.1 billion in sales but posts margins at just 4% and change, as power technologies, is a niche $1.2 billion business with margins of 7% and change.
The problem remains with the tiny margins of the business overall, with GAAP operating profits of $316 million working down to margins around 3% of sales. In fact, after accounting for interest expense and taxes, minimal GAAP earnings of $38 million were reported. The company posted adjusted earnings of $122 million after a number of adjustments.
While I am happy to adjust for amortization charges and distressed supplier costs, some costs like restructuring expenses have an almost structural element to it in the case of Dana, certainly during a transition period. If one accepts these adjustments, earnings came in at $0.84 per share, comparing to a GAAP profit number of $0.26 per share.
Contrary to the improvement in the full year results, Dana ended the year on a softer note with fourth quarter sales down 2% and change, to just below $2.5 billion, with both adjusted and GAAP losses reported. This is attributed to seasonality effects, but certainly also the impact of the UAW strike.
Valuation Thoughts
Despite the softer end to 2023, the company sees a modest recovery in 2024. For the year, sales are seen up a modest 3% at a midpoint of $10.9 billion, yet adjusted EBITDA is expected to increase nearly 10% to a midpoint of $925 million, indicating that some margin improvements are seen, attributed to a further recovery in supply chains after a few tough years post-pandemic.
With adjusted EBITDA reported at $845 million, these earnings improvements are badly needed with net debt reported at $2.1 billion by year-end 2023, for a leverage ratio of 2.5 times. Note however that real profitability is limited (and thereby the potential to deleverage), as this net debt definition excludes a couple hundred million dollars in operating lease liabilities and pension obligations as well.
Note that leverage is high amidst modest adjusted earnings, already high clean leverage ratios, other implicit liabilities, and a large transition to be made. This is confirmed in the equity valuation, as the 144 million shares grant equity just a $1.7 billion valuation at $12 per share, far trailing reported net debt. That is logical, as the transition and work ahead is real and substantial, and investors might not have forgotten that Dana has seen financial troubles in the past; in fact, it went bankrupt in 2006.
Coming out of bankruptcy, the business has mostly traded in a $10-$30 range since the early 2010s, now trading towards the lower end of the range, which is understandable given the adjusted earnings and challenges faced.
This comes as despite a modest growth on the topline, margins have gradually been coming down, due to competition as well as the impact of running parallel product groups amidst the electrification of the end markets, pressuring margins for years to come in all likelihood.
A Tiny Deal
Just following the release of its 2023 results, Dana announced a small divestment. The company has reached a deal to sell its European hydraulics business to HPI Group.
The company, which produces industrial components, generates some $90 million in sales, just below 1% of total revenues. While no purchase price has been communicated, the deal likely will bring in tens of millions to reduce debt, but it is anything of a game changer to the investment thesis here.
What Now?
While shares look cheap, they are cheap for a reason, as more than a century in business, Dana has failed to deliver on (consistent) returns to investors, in fact, its net debt load has been increasing with the passage of time (again) in recent years.
While improvements are seen in 2024, absolute earnings remain small in relation to debt and its challenges, as the EV transition undertaking is real. After all, just three-quarters of a billion in sales were generated from EVs in 2023, just about 7% of total sales.
One potential solution to this is to become a better business, as the company does have a very strong and lucrative off-highway business. In theory, Dana might be able to isolate this business, by spinning off units, or selling less performing light vehicle and commercial vehicle businesses, provided that it does not create too many dis-synergies.
As I have no clues that such drastic events are considered right now, I see that shares look cheap, but cheapness alone is not enough of a reason. This is certainly the case given the continued transformation to come, making me not compelled to get involved here, as Dana still has a long transitioning road to go.
