DCH: Takeaways from Dauch Facility Tour and Mgmt Meetings

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DCH: Takeaways from Dauch Facility Tour and Mgmt Meetings

estors have been asking AllPricedvaluesas ofin priorUSD unlesstradingotherwiseday's marketnoted.close, EST (unless otherwise noted).

about the potential of OEM insourcing on legacy DCH products - particularly

on Axles. Currently, DCH is on GM standard and HD and RAM HD. Ford

standard and Ram standard are both done in-house. Ford HD is done by

Dana. The tour illustrated just how much infrastructure is required to make,

test, and validate axle products. Further, we expect that by combining axles

with DWL sideshafts, sourcing directly from DCH could be more compelling.

We also do wonder if Stellantis and Ford warranty issues, which have been

worse than GM, could be due in part to insourcing. We suspect that Ford

and Stellantis insource their axles on standard trucks because they already

made the investment in the past. For GM to do this now would be far more

costly and this is not a priority. We also think OEMs are focused more on

spending on software (ADAS, connectivity, SDV), rather than on insourcing

axles.

Strong capital return likely in 2028/2029. In this report, we illustrate that

just by conservatively growing EBITDA only by synergies achieved, DCH can

reduce leverage to 2.7x by year-end 2027, thereby allowing the company

to return capital starting in 2028. Impressively, by year-end 2029, leverage

could drop to just under 2x. Management has stated its preferred leverage

target is 2.5x, and it would pursue capital return at that level. Given this,

if it were to lever up to 2.5x, the company could return ~$1B by year-end

2029, or 75% of the entire market capitalization of the company.

Maintain Outperform. Our $10 price target is conservatively based on a

4.5x EV/EBITDA multiple on our 2026 adj.