Momentum Drives Magna Into 2015

1/12/2015


  Recent Price
$107
  Dividend
$1.52 (est.)
  Yield
1.4% (est.)
  P/E Ratio
12
  Shares (millions)
214
  Long-Term Debt as % of Capital
8
  52-Week Price Range
$114.48 - $80.04

The U.S. car industry enters 2015 with five straight years of sales growth. Magna International ($107; MGA) has benefited from that run, with its per-share profits, revenue, and operating cash flow at record highs.

Magna builds chassis and powertrain systems, supplies other exterior and interior parts, and in some cases assembles entire vehicles. The stock has more than doubled since being added to our Focus List in January 2013. All six Quadrix categories rank in the top half of our research universe, contributing to an Overall rank of 98. The stock is a Focus List Buy and a Long-Term Buy.

Geared up for more gains

Magna shares surged 32% in 2014 alone and appear positioned to rise further in the year ahead for the following reasons:

• Expectations for auto sales could prove conservative, given the recent plunge in fuel prices. Industry researcher Kelley Blue Book sees U.S. auto sales growing about 2% to 16.9 million vehicles in 2015. However, automakers posted stronger-than-expected U.S. results in December, and the continuation of low gasoline prices could stoke more driving activity and car sales in the coming year. North America generates about half of Magna's revenue.

• Magna's customer base is fairly balanced, with General Motors ($36; GM), Fiat ($12; FCAU), BMW, Ford Motor ($15; F), Volkswagen ($42; VLKAY), and Daimler each representing 10% to 20% of revenue. This diversity limits Magna's exposure to company-specific problems. Both Ford and Daimler issued disappointing guidance in the final four months of 2014. Yet in November, Magna raised its 2014 guidance for vehicle production in both North America and Europe.

• Magna offers a blend of growth prospects and valuation superior to that of many of auto parts and equipment stocks in the S&P 1500 Index. For the 12 months ending September 2015, analysts expect Magna's per-share profits to rise 11%, compared to a peer-group average of 10%. Yet Magna shares trade at just 11 times estimated earnings, while its peer group averages a forward P/E ratio of 16.

• Magna uses strong cash-flow trends to reward shareholders. Free cash flow surged 61% to $636 million in the nine months ended September, yet net cash dropped 70% to $360 million during that period. In November, Magna said it would keep reducing cash on the balance sheet in 2015. The company has approved the repurchase of at least 20 million shares through November 2015, more than 9% of outstanding shares.

Since the beginning of 2013, stock buybacks have reduced the share count 9%, with shares costing an average of $87. Magna also tends to raise its quarterly dividend when announcing December-quarter results, typically in late February or early March. Although the dividend has risen at an annualized rate of 15% over the past three years, Magna's payout ratio remains quite modest at 17% of earnings.

Magna will likely give its 2015 guidance later this month. An annual report for Magna International Inc. is available 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 '14
2.22
vs.
1.53
6%
114.48
-
94.24
14 - 12
Jun '14
2.37
vs.
1.78
6%
109.15
-
93.30
15 - 13
Mar '14
1.99
vs.
1.59
7%
98.25
-
79.92
14 - 11
Dec '13
2.08
vs.
1.29
14%
88.76
-
75.76
14 - 12
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
34.84
6.98
1.28
88.76
-
50.77
13 - 7
2012
30.84
5.37
1.10
50.13
-
33.32
9 - 6
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
81
87
95
58
55
71

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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