Can Magna drive your portfolio? Autonomously? ;)
Key Stats for Magna International Inc. (USA)
| Ticker | MGA |
|---|---|
| Sector | Auto, Truck & Motorcycle Parts |
| Latest price | $45.72 |
| Value | $17,392M |
| Daily vol | $80M |
| Date | 27 June 2017 |
| Links | SEC Filings, magna.com |
1. What do they make?
Magna International is a global automotive supplier, HQed in Canada with over 300 manufacturing plants and sales in 30+ countries.
The Company's products include producing body, chassis, exterior, seating, powertrain, electronic, active driver assistance, vision, closure, and roof systems and modules, as well as vehicle engineering and contract manufacturing.
- The US and Canada is over 50% of sales where their clients include BMW, Daimler, Fiat Chrysler, Ford, General Motors, Honda, Hyundai-Kia, Mazda, PACCAR, Renault-Nissan, Tesla, Toyota and Volkswagen.
- Europe's over 30% of sales and there's a similar list of clients, but also includes Geely, PSA Peugeot Citroën, Renault-Nissan, and Tata Motors.
- In Asia they serve the usual suspects, and: Chery Automobile, First Automobile Works, and Great Wall Automobile.
So it's a who's who of the motor industry!
But let's compare there concentration of sales with global sales:
| Metric | % of Magna sales | % global share |
|---|---|---|
| GM | 20% | 8% |
| Ford | 16% | 7% |
| Fiat Chrysler | 15% | 5% |
| Daimler | 12% | 2% |
| Volkswagen | 10% | 11% |
| BMW | 10% | 3% |
| Others | 17% | 63% |
In fact, despite the client list they are way behind in sales to five of the top 10: Toyota, Hyundai, Nissan, Honda and Suzuki. Not a surprise given the small sales % in Asia. Perhaps, here lies the biggest opportunity?
And if we look at the recent performance, the top line's pretty rocky, though that does include a major disposal in 2015.
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A |
|---|---|---|---|---|---|
| Revenue | $31bn | $35bn | $34bn | $32bn | $36bn |
| EPS | $3.05 | $3.38 | $4.34 | $4.88 | $5.16 |
In fact the 2016 performance at the bottom line was boosted by their aggressive buyback program. It's been remarkable their pace of share buybacks.
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A |
|---|---|---|---|---|---|
| Shares | 470m | 462m | 433m | 413m | 393m |
Now, I ain't against buyback, and in the case of MGA they are being sensible on the debt front, with just $2bn on the books which is less than 1x profit.
Though if I had to be mean, I'd say their preference for buybacks to dividends annoys me. The forecast dividend of $1.08 compares to a forecast EPS of $5.76. That's not generous! Typically higher dividends indicates greater management confidence.
2. How do they compare
In terms of sales, they are one of the largest players in the world. But their product line doesn't give them a particularly high margin. So it's no wonder they've been streamlining their portfolio and making targeted acquisitions.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Magna International Inc. (USA) | $36,917M | 10% | 21% |
| Continental AG (ADR) | $46,615M | 15% | 20% |
| Cummins Inc. | $17,807M | 12% | 21% |
| Delphi Automotive PLC | $16,902M | 18% | 48% |
| Genuine Parts Company | $15,527M | 8% | 21% |
| LKQ Corporation | $9,005M | 12% | 14% |
| Autoliv Inc. | $10,252M | 12% | 16% |
And it shows at the valuation line. 8 times earnings. Yuck! Okay the growth doesn't look great. But surely that's too low.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield |
|---|---|---|---|---|
| MGA | $17,392M | 8x | 3% | 2% |
| CTTAY.PK | $44,053M | 13x | 8% | 2% |
| CMI | $26,691M | 17x | 14% | 3% |
| DLPH.K | $23,183M | 13x | 13% | 1% |
| GPC | $13,436M | 19x | 8% | 3% |
| LKQ.O | $10,072M | 17x | 27% | 0% |
| ALV | $9,642M | 17x | 8% | 2% |
What am I missing?
3. What does Wall Street thinks?
Perhaps it's not just me. The professionals on Wall Street have a $54 price target, i.e. nearly 20% above todays price for Magna. And their recommendation to clients is Buy.
If we look at the current valuation of 8x forward earnings, that's not the cheapest... it has been as low as 6x, but it's not the highest, which was 12x about 2 years ago.
Again, I am a little puzzled, as they've beaten earnings 7 out of the last 8 quarters.
key themes?
And if you listen to the latest conference call, they do a good job explaining why Magna's portfolio is well positioned to deliver in an electric and an autonomous world.
And on that call, the cashflow theme was "delightful"!
We now expect free cash flow between $1.1 billion and $1.3 billion, an increase from the $800 million to $1 billion that we had previously expected. This change largely reflects our increased outlook. We expect approximately $5 billion in free cash flow in the 2017 to 2019 time frame, based on the 2019 outlook parameters we set out in January this year.
4. Zoom zoom / kaboom
Is this one of those forgotten "foreign" big caps? Where the sales and earnings are on the rise, but investors are yet to "buy into it".
Or is this the last hurrah and top of the cycle? I remember when I started out as an analyst the joke was that Ford's cheap on 40x earnings and expensive on 5x earnings. As you buy on the trough and sell on the peak.
Magna's intriguing. Okay it's hardly going to the moon, but at 8x earnings can it really explode.
I'm tempted. You?
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Disclosure:
I have no position in any of the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author:
- u/shane_stockflare
- Shane Leonard, CFA
Submitted June 27, 2017 at 03:12PM by shane_stockflare http://ift.tt/2thC1T7
