Linamar designs and manufactures precision-machined parts and modules for engine, transmission and chassis uses for sale to OEMs and Tier 1 suppliers.
Toronto-based CIBC World Markets analyst Kevin Chiang reduces his target price and recommendation for manufacturing stock Linamar Corp. (TSX—LNR), saying the company’s end markets (namely the industrial segment) for precision-machined parts is facing heightened volatility due to US-China trade tensions.
Until he gets some clarity on these end markets (probably within six-to-12 months), the analyst expects Linamar’s share price will be range bound as LNR can rely on its diverse customer base in the meanwhile. Mr. Chiang comments:
“While we remain positive on the company’s long-term outlook and its diversification strategy, we are downgrading Linamar from ‘outperformer’ to ‘neutral’ with our price target falling from $56 per share to $48 on the back of our (negatively) revised earnings outlook. . . . We view Linamar’s total book value per share (priced at the end of the second-half 2019) of roughly $34 as a good entry point,” Mr. Chiang states.
“We lowered our estimates with Linamar’s mid-quarter update with the company highlighting softer outlooks across its three key end markets (i.e. automotive, agriculture and industrial sectors).
Auto production forecast lowered
“Linamar noted the following: IHS Markit (a data and information services business that caters to a variety of industries including automotive, energy, financial services, defence and maritime) lowered its third-quarter and full-year 2019 auto production forecast by 1.1 million units and 2.3 million units, respectively, from its June forecast. The General Motors Co. strike has negatively impacted third-quarter production.
“Secondly, Linamar noted expectations for a 15 per cent to 25 per cent year-over-year drop in volumes in the third quarter for the access market in North America and Europe for core scissor- and boom-lift products (i.e. hydraulic equipment used to jack up automobiles for manufacturing and/or repair), partially driven by rental capital-expenditure outlook reductions among customers.
“Thirdly, North American agricultural combine harvester retail sales are down 20 per cent year-over-year for July and August (cumulative) driven primarily by trade talks between the US and China.
US-China trade friction weighs on LNR earnings
“We have lowered our 2019 and 2020 earnings per share estimates for LNR by an average of about 10 per cent on the back of its mid-quarter update. We had entered 2019 expecting a softening in the auto cycle but that its diversification strategy would help offset this with growth out of Winnipeg’s agriculture machinery company MacDon Industries Ltd. (acquired for $1.2 billion in Dec. 2017) and Guelph-based aerial-work platform manufacturer Skyjack Inc. (acquired in 2002). Instead, given the growing trade friction between the US and China, it has been the industrial segment that has weighed on Linamar’s earnings outlook in recent months.
“Linamar now has a major unknown within its industrial segment which has been sideswiped by trade tensions. North American farmers are not buying agriculture equipment given the decline in exports to China.
“This has been echoed by other original equipment manufacturers, including Deere & Co. Furthermore, the uncertainty from trade and tariffs has contributed to a decline in capital investments which in turn has weighed on rental equipment demand. Until we get some clarity on these end markets, we expect that LNR’s share price will be range bound.”
This is an edited version of an article that was originally published for subscribers in the November 22, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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