Dana Stock: Recent Decline Represents Valuable Opportunity (NYSE:DAN)

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Over the years, I have become convinced that a big contributor to the market’s fluctuations in the short term is the underlying sentiment of investors. When investors are ecstatic, they can cause shares to rise far greater than the fundamentals warrant. Conversely, when there is a great deal of pessimism, shares can be pushed far lower than they should be. A great example of a company that fits into the latter category is Dana Inc. (NYSE:DAN). Due to broader fear in the economy and, in part, due to concerns about management’s ability to meet guidance expectations for the current fiscal year, shares of the power conveyance and energy management solutions company have been pushed down significantly in recent months. Even if financial performance does revert back to what it was in prior years, however, shares of the firm do look to be trading at fairly cheap levels. Long term, it’s likely that the company will continue to fare well. And because of this, investors would be wise to consider adding this to their list of opportunities to consider buying into.

Assessing recent performance

Back in January of this year, I wrote an article detailing the investment worthiness of Dana. In that article, I called the company a solid play for value investors to consider. I acknowledged the company’s strong turnaround results, and I said that cash flow was robust and shares were trading at levels that investors should consider to be cheap. At the end of the day, this led me to rate the business a ‘buy’, indicating my belief that, in the long run, the company would generate returns that comfortably outpace the broader market. Since then, I have been disappointed. Even with attractive expectations provided by management, shares of the enterprise have fallen by 33.6%. This compares to the 18% decline experienced by the S&P 500 over the same window.

Historical Financials

Author – SEC EDGAR Data

Given this significant disparity, one might be forgiven for thinking that the fundamental performance of the company has suffered tremendously. But the picture is far more complicated than that. Consider how the company ended its 2021 fiscal year. For the year as a whole, the business ended up generating revenue of $8.95 billion. This represents an increase of 26% over the $7.11 billion generated one year earlier. And it’s also 3.9% above the company’s pre-pandemic revenue of $8.62 billion. The strongest growth for the company actually came from its Off-Highway segment, with revenue surging by 31.9% year over year, climbing from $1.97 billion to $2.59 billion. Of course, in the other segments, the company has also improved compared to 2020.

Historical Financials

Author – SEC EDGAR Data

From a profitability perspective, the picture is a bit more complicated. Net income in the 2021 fiscal year came in at $197 million. That is a drastic improvement over the negative $31 million achieved in 2020. But it still pales in comparison to the 2019 level of $226 million and the 2018 level of $427 million. At the end of the day, I don’t believe that net earnings are a significant determinant of the company’s value. Instead, investors would be wise to look at cash flow data. Operating cash flow data for the company during 2021 came in at $158 million. That’s actually down from the $386 million reported one year earlier. But if we adjust for changes in working capital, it would have risen from $319 million in 2020 to $563 million last year. Another metric that was on the rise was EBITDA. It ultimately increased from $593 million in 2020 to $795 million in 2021.

Topline growth for the company continued into the 2022 fiscal year. For the first quarter of the year, management reported revenue of $2.48 billion. This is 9.6% above the $2.26 billion generated in the first quarter of 2021. At the same time this took place, profitability for the company declined, with net income dropping from $71 million to just $17 million. Operating cash flow went from $27 million to negative $121 million. Even if we adjust for changes in working capital, the metric fell from $160 million to $90 million. Meanwhile, EBITDA dropped from $234 million to $170 million.

Despite these changes, management seems to have high hopes for the current fiscal year. Revenue should come in at between $9.85 billion and $10.35 billion for the company’s 2022 fiscal year. The midpoint figure here of $10.1 billion would represent a year-over-year increase of 12.9% compared to what was achieved last year. At the same time, EBITDA should come in at between $770 million and $870 million while operating cash flow, assuming it rises at the same rate that EBITDA should at its midpoint, should come in at $626.2 million. Using these figures, it’s not difficult to value the company.

Trading Multiples

Author – SEC EDGAR Data

Assuming management can come through on its guidance, the firm is trading at a forward price to adjusted operating cash flow multiple of 3.5 and at an EV to EBITDA multiple of 5.7. Even if financial performance were to revert back to what it was in prior years, Dana would be sitting pretty. Using the 2021 figures, for instance, the company is trading at multiples of 3.9 and 5.9, respectively. And using the data from 2020, these multiples would be 6.9 and 7.9, respectively. To put the pricing of the company into perspective, I decided to compare it to the same five firms that I compared it to in my prior article. On a price to operating cash flow basis, these companies ranged from a low of 7.3 to a high of 159.8. In this case, Dana was the cheapest of the group. Meanwhile, using the EV to EBITDA approach, the range was from 1.5 to 16.2. In this scenario, four of the five companies were cheaper than our prospect.

Company Price/Operating Cash Flow EV/EBITDA
Dana Inc. 3.9 5.9
LCI Industries (LCII) 159.8 6.0
Patrick Industries (PATK) 2.3 4.8
Dorman Products (DORM) 32.7 16.2
Standard Motor Products (SMP) 11.6 7.7
Garrett Motion (GTX) N/A 1.5

Takeaway

Relative to similar companies, Dana has pricing that makes it look rather mixed. But on an absolute basis, I would make the case that shares are very cheap, even if we return back to 2020 levels. The firm is definitely facing some pressure right now, likely as a result of supply chain problems and high inflation. But for long-term investors, this would not be much of a concern. The company may be destined for a rather lumpy ride over the next few quarters. But for those focused on the long haul, none of that will matter.

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