DANA Holding Corporation (DAN)

[conix]

Dana: Shifting Into High Gear

Dec. 12, 2019 7:19 PM ET

Michael A. Gayed, CFA

Summary

Dana Inc. has made acquisitions of electric vehicle technology companies to give it an industry leading position.

Dana will start a 3-year plan to synthesize all these acquired technologies and have a fully electric power-train system.

Dana pays a solid dividend and looks ready to increase it.

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What's behind you doesn't matter. - Enzo Ferrari

Every morning, people around the world get in their vehicle, start their engine, and go about their day. There is not much thought put into the parts of the vehicle that keep it running smoothly until the day comes when the vehicle won't work. Dana Incorporation (DAN) is a leading manufacturer of axles, driveshafts, and transmissions. They are rapidly moving into the electrified vehicle market. With a recent acquisition, they are now the only supplier with full electric propulsion design, engineering, and manufacturing capabilities. DAN has taken some much-needed steps to secure their future success, and now is the opportunity to get into a growing company.



Dana Inc. recently bought Nordsea Motors Inc., a Canadian company focused on design and integration of electric powertrain system. This purchase completes the missing pieces in Dana's electrification plan. In 2019, Dana has made three acquisitions, all of which were focused on the electric vehicle market. They have a 3-year plan starting in 2020 to synthesize all these new technologies and to have a complete e-Powertrain system in place. They already have a $200 million backlog of sales for their electric systems. Dana has reached into every vehicle market with their electric systems - cars, light trucks, heavy trucks, construction equipment, and agricultural vehicles. This is the future of the vehicle market, and Dana has made the choice to lead the way.

With all these acquisitions and the build-out of their electrification unit, it has cost Dana in the short term. Their profit margin declined from 12.4% in the 2nd quarter to 11.6% in the 3rd quarter, due to the added costs. The acquisitions did help fuel sales growth for the most recent quarter which offset a decline in end-market sales of heavy vehicles. The heavy vehicle market has been the biggest drag on sales. Sales in this area are down 2% compared to 3rd quarter 2018 and earnings fell 1.3%.

Another positive metric for Dana Inc. is the amount of free cash flow they are producing. Now that many of the one-time costs are behind them from the acquisitions and pension adjustments, they should be able to generate a tremendous amount of free cash flow to use to grow their business and return to shareholders. During the second quarter, free cash flow was negative because of a large pension contribution but came roaring back in the 3rd quarter to $123 million and is expected to hit almost $200 million for 2019. In order to stay ahead of the pack in electrification, Dana will need to continue generating free cash flow to fund more acquisitions and develop new technologies.

Given Dana's global presence, they have also faced currency headwinds this year. With the stronger dollar, it has mostly hurt translation of their European sales. Of Dana's Off-Highway Drive sales, 69% are from Europe and over 40% of Power Technologies come from Europe. But as noted in the Lead-Lag Report, "December has seen steady declines in the dollar index indicating that any positive momentum it has been building could be fizzling out." Any weakening of the US dollar will help Dana's bottom line, which I expect to see in 4th quarter results.

Dana pays a solid dividend of $0.10 per share for a 2.29% yield. The dividend has remained steady for the past two years. Dana's 5-year historical cash dividend payout ratio is 34.5%. Dana's current payout ratio of 25.1% is well below their historical rate. If free cash flow continues to grow, I'd expect to see an increase in the dividend in 2020.

If you are looking for a solid company that can innovate to stay at the top of their industry, then look no further than Dana Inc. Any pullback in the general market makes for a good opportunity to add Dana to your portfolio.