Magna's Faster Than You Think

1/28/2013


  Recent Price
$53
  Dividend
$1.10
  Yield
2.1%
  P/E Ratio
10
  Shares (millions)
235
  Long-Term Debt as % of Capital
1%
  52-Week Price Range
$54.18 - $36.54

At first glance, it looks like Magna International ($53; MGA) will stomp on the brakes this year. After generating growth of 26% in per-share profits and 39% in operating cash flow in the 12 months ended September, the consensus projects the Canadian auto-components maker's per-share profits will rise just 2% in 2013.

Don't be fooled by the low profit number. The acquisition of a controlling interest in E-Car, a provider of parts for electric and hybrid cars, will boost noncash amortization expense by $39 million per quarter from October 2012 through December 2013, which equates to more than $0.50 per share for the year. Ignore the noncash costs, which Magna says it will not exclude from income, and per-share profits should grow at least 12% in 2013.

E-Car notwithstanding, analysts tend to underestimate Magna's earnings power; profits topped estimates by 10% in each of the last four quarters. The stock, already a Buy, is being added to the Long-Term Buy List.

Market forces support growth

Last year, Americans purchased 14.5 billion cars and light trucks, up 13% from 2011 and the most since 2007. The Blue Chip Economic Indicators consensus projects U.S. sales of 15 billion cars and light trucks this year and 15.6 million in 2014, representing 3.5% and 4% growth, respectively. Automakers expect faster growth, but Magna can do well even if conservative estimates prove accurate.

Since 2000, global auto production has risen at an annualized rate of 3% while Magna's sales and operating cash flows have risen at an annual rate of more than 9%. Magna, with financial flexibility and a history of market-share expansion, can deliver decent growth even if car demand is less than robust.

About the business

Automobile components and systems account for 85% of Magna's revenue, with 8% from complete vehicle assembly and 7% from engineering and other services. Magna generates at least 10% of its sales from each of seven different carmakers, but none accounts for more than 22%.

In the nine months ended September, North America and Europe accounted for nearly 94% of sales and all profits, as operations in the rest of the world lost money. However, sales outside North America and Europe jumped 31%, and profitability should improve as Magna gains scale.

Magna's growth is not always smooth, given the cyclicality of automobile demand. The company augments growth with acquisitions. In the December quarter, Magna paid $450 million for two makers of pumps for engines, deals expected to boost profits in 2013. Acquisitions add risk to a stock, but Magna has the balance sheet to handle them. At the end of September, Magna held enough cash to retire its debt three times over.

Conclusion

Magna shares have jumped 25% since mid-November but still look cheap, trading at a discount of at least 39% to their peer group based on trailing price/earnings, price/sales, and price/operating cash flow ratios. Obtain an annual report for Magna International Inc. at 337 Magna Drive, Aurora, Ontario, Canada L4G 7K1, (905) 726-2462, www.magna.com.

MAGNA INTERNATIONAL
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '12
1.13
vs.
0.94
6%
47.27
-
36.96
9 - 7
Jun '12
1.48
vs.
1.11
5%
49.13
-
36.54
11 - 8
Mar '12
1.46
vs.
1.34
7%
49.60
-
33.32
11 - 7
Dec '11
1.13
vs.
0.99
10%
40.99
-
30.03
9 - 7
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
28.75
4.53
1.00
62.20
-
30.03
14 - 7
2010
24.10
4.32
0.42
52.98
-
25.58
12 - 6
2009
17.37
-1.34
0.09
25.98
-
9.81
NA
2008
23.70
1.69
0.63
40.98
-
11.40
24 - 7
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
69
83
83
45
86
88

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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