Global

Critical Comparison: American Axle & Manufacturing Holdings, Inc. (AXL) vs. Honeywell International Inc. (HON)

American Axle & Manufacturing Holdings, Inc. (NYSE:AXL) shares are down more than -4.46% this year and recently increased 1.31% or $0.21 to settle at $16.27. Honeywell International Inc. (NYSE:HON), on the other hand, is down -4.31% year to date as of 04/16/2018. It currently trades at $146.75 and has returned 2.74% during the past week.

American Axle & Manufacturing Holdings, Inc. (NYSE:AXL) and Honeywell International Inc. (NYSE:HON) are the two most active stocks in the Auto Parts industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect AXL to grow earnings at a 2.10% annual rate over the next 5 years. Comparatively, HON is expected to grow at a 10.00% annual rate. All else equal, HON’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 20.56% for Honeywell International Inc. (HON). AXL’s ROI is 9.40% while HON has a ROI of 9.60%. The interpretation is that HON’s business generates a higher return on investment than AXL’s.

Cash Flow



Cash is king when it comes to investing. AXL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.24. Comparatively, HON’s free cash flow per share was +1.57. On a percent-of-sales basis, AXL’s free cash flow was 0.43% while HON converted 2.91% of its revenues into cash flow. This means that, for a given level of sales, HON is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. AXL has a current ratio of 1.60 compared to 1.40 for HON. This means that AXL can more easily cover its most immediate liabilities over the next twelve months. AXL’s debt-to-equity ratio is 2.59 versus a D/E of 1.04 for HON. AXL is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

AXL trades at a forward P/E of 4.77, a P/B of 1.17, and a P/S of 0.29, compared to a forward P/E of 16.83, a P/B of 6.45, and a P/S of 2.72 for HON. AXL is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AXL is currently priced at a -19.01% to its one-year price target of 20.09. Comparatively, HON is -15.63% relative to its price target of 173.94. This suggests that AXL is the better investment over the next year.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. AXL has a beta of 1.38 and HON’s beta is 0.97. HON’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment




Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. AXL has a short ratio of 6.77 compared to a short interest of 2.28 for HON. This implies that the market is currently less bearish on the outlook for HON.

Summary

Honeywell International Inc. (NYSE:HON) beats American Axle & Manufacturing Holdings, Inc. (NYSE:AXL) on a total of 9 of the 14 factors compared between the two stocks. HON higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, AXL is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, HON has better sentiment signals based on short interest.

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