Magna International is profiting from a strong demand for cars. It should earn more money this year and next. It remains a buy for further gains and rising dividends.
Vehicle manufacturers have gradually done business with fewer auto-parts suppliers. But they’re doing more business with top-tier suppliers, such as Magna International. More of Magna’s parts in each vehicle means that it can earn more even if car sales stay the same. In times like these, when demand for vehicles is high, the company can profit more than ever.
And Magna is certainly profiting from that strong demand for vehicles. In the nine months to September 30, it earned $1.373 billion, or $6.26 a share (all figures in U.S. dollars unless preceded by a C). This was up by more than 32 per cent from earnings of $1.103 billion, or $4.74 a share, a year earlier.
Magna’s earnings per share climbed more than total earnings. That’s because in the first nine months, it spent a net $1.386 billion to buy back 12,866,761 of its own shares. The company has renewed its buyback plan. Up until November 12, 2015, it can repurchase as much as 20 million shares. To the extent that it does, Magna’s earnings per share should continue to outpace its total earnings growth.
Magna’s sales grew faster than its costs
In the first nine months, Magna’s sales rose by 6.2 per cent, to $27.2 billion. Sales rose in five of its six segments. Sales in North America climbed by 9.8 per cent, to $13.583 billion (or nearly half of total sales). Sales in Europe edged up by 3.7 per cent, to $7.643 billion (28 per cent of sales). Sales in Asia jumped by nearly a fifth to $1.189 billion (4.4 per cent of sales). Sales in the rest of the world, however, fell by more than a quarter, to $499 million (1.8 per cent of sales). Sales of Complete Vehicle Assembly inched up by 3.2 per cent, to $2.346 billion (8.6 per cent of sales). And sales of Tooling, Engineering and Other rose marginally, to $1.985 billion (7.3 per cent of sales).
Magna’s costs as a group increased by 4.6 per cent to $25.383 billion. Since costs rose significantly less than the sales, its pre-tax earnings jumped by more than a third, to $1.862 billion. Unfortunately, the company’s tax rate went up by more than 5.2 percentage points, to almost 26.4 per cent.
In the first nine months, Magna’s cash flow rose by 14.4 per cent, to $2.156 billion. This confirms its higher profit. The cash flow exceeded net investment of $942 million and dividend payments of $241 million.
Excess cash flow should keep Magna’s balance sheet healthy. Cash of $1.435 billion exceeds debt of $1.075 billion. That is, Magna has no net debt.
Diversified geo-politically and by product offering
Magna is well diversified. It operates 312 manufacturing plants and 83 product development, engineering and sales centres in 29 countries. This reduces its exposure to countries with weak economies—such as Euro-zone countries. The only exception is North America, where it makes most of its money.
Magna is also diversified by its product offering. It writes, “Our product capabilities include producing body, chassis, interior, exterior, seating, power train, electronic, vision, closure and roof systems and modules, as well as complete vehicle engineering and contract manufacturing.” This means that Magna can fulfill most of its customer needs.
In 2014, Magna is expected to earn $8.78 a share. That’s up by over 21 per cent from $7.23 a share last year. In 2015, its earnings are expected to jump by 15.8 per cent, to $10.17 a share. That works out to C$11.48 a share.
Magna International (TSX—MG; NYSE–MGA) remains a buy for further long-term price gains and rising dividends.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •12/16/14 •