American Axle & Manufacturing Holding (Ticker: AXL)

Increased position from 2% to 4% in American Axle & Manufacturing Holding (Ticker: AXL) at $10.10.

AXL reported revenue and EPS of $618 million and $0.52 that beat street expectations of $559 million and $0.38. Management provided full year revenue growth of expectation of 45-50%, up from 40-45% offered three months ago. However, given the strong third quarter results this guidance implies revenue in the fourth quarter between $507-583 million versus consensus of $559 million. This suggests analysts will modestly drop their revenue estimates for the fourth quarter (reason for stock weakness today), although 2011 revenue likely remains stable. Management said on the conference call that they do not foresee any changes in the cost structure that will pressure margins in 2011, allaying some of my concern about the impact of higher commodity prices. They expect EBITDA margins likely at the higher end of the their long-term range of 11-15%

Assuming the consensus 2010 full year revenue estimate remains around $2.2 billion (low end of 45-50% growth range), a modest 10% increase in top line (below the minimum run-rate in order for management to double revenue by 2013) moves the consensus 2011 revenue estimate to $2.4 billion (from $2.3 billion). A conservative 14% EBITDA margin in 2011 (given management's expectation of few changes in the cost structure to reduce margins for 15% 2010 levels) produces around $340 million. The current market price of $9.30 implies an enterprise value of $1.46 billion and produces an EV-to-2011 EBITDA estimate of 4x.

New to my thinking since yesterday: Higher than expected sales, a growing tailwind from GM marketing spending and recovering orders for vehicles, and a stable cost structure suggest the company could provide above average EPS growth for the 2-3 years. My biggest worry is an economic slowdown, which I continue to believe is remote in the next few quarters.