American Axle (NYSE:AXL): Buckingham making a positive call

Buckingham Research is out with a very positive call on American Axle (NYSE:AXL), saying to buy the shares ahead of scheduled interest payment on August 11th:

We reiterate our STRONG BUY rating and $9 price target ahead of AXL’s scheduled interest payment on August 11th. We believe if management makes its interest payment, investors could likely rally AXL shares, as many will anticipate an eventual permanent positive resolution regarding the company’s credit facility issues. We continue to believe a credit agreement will likely be reacted with accelerated payment terms by GM. Moreover, we no longer believe this investment is “binary”, given the current stock price. We would be aggressive buyers of AXL ahead of Tuesday’s interest payment, with the understanding that this investment is speculative in nature.

We continue to believe there is a 75% chance that management will make its scheduled interest payment of ~$7M on the company’s 5 ¼ debt due 2014. AXL’s bonds have rallied considerably over the past week (up ~57%), which we view as a positive sign that management will make its interest payment and that an eventual finalization of a more permanent credit facility.

As management stated, they DO NOT need the approval from the lending group under the current waiver agreement (set to expire on August 20th), but the lending group could elect to terminate the waiver if they object to management electing to make the payment. We believe it is highly unlikely that the lending group will vote to terminate the waiver agreement set to expire nine days after the scheduled interest payment, as the creditors are very cognizant of the likely market reaction of management’s decision to make the payment. We believe the stock rallies considerably and improve alternative methods,( i.e. an equity issuance as last resort) to improving the company’s capital structure outside a formal bankruptcy process

Some facts – (1) historically, management has never put a press release or 8-K filing out stating when it has made interest payments in the past, and we don’t expect them to Tuesday and (2) the interest payment is due by the end of business (presumably banking hours) on Tuesday August 11th and is made through fund transfers. We are simply stating these facts to set expectations correctly, given the volatile nature of the stock recently. Additionally, we are expecting to channel check bond holders to see if the payment was make on August 11th. In the event the interest payment is not made, we believe the stock will react very unfavorably, but management would still have another 30 day to make the interest payment.

We believe GM will be willing to accelerate payment terms in an effort to improve AXL’s near-term liquidity given the importance of GMT900 production and its expected profit contribution to GM. Additionally, the UAW, which owns a significant stake in GM, likely want to preserve their pension and OPEB benefits. Lastly, normal bankruptcy processes typically are full of significant risks, including potential production disruption and accessing DIP financing. We believe the estimated $100M improvement in liquidity to AXL dramatically minimizes the potential cash outlay and the associated GM’s profit loss risk if AXL were to file for bankruptcy.

Action: I have mixed feeling on this one. Buckingham's auto parts research team is respected among investors and with catalyst coming already tomorrow, would expect some buyers to step in. Also, troubled companies with huge debt & short interest have been favorites of the momo crowd lately. However, stock has already had a huge run and in the unlikely event of missing the interest payment longs would get slaughtered.
I would still expect buy-the-rumor kind of action today, so those with kamikaze tendencies might want to grab some shares early on.