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This Auto Parts Bull Is Expected to Continue Outperforming

March 13, 2014 | About:

The auto parts industry is starting to regain momentum and suppliers are making hefty profits from an improving economic situation. Or at least this seems to be the case for industry giant Magna International Inc. (MGA).

Magna is an amply diversified company that is divided in three business segments: the External Production Sales segment, the Complete Vehicle Assembly operating Group, and Tooling, Engineering and Other. The biggest operating group is the External Production Sales segment, and is spread in various geographic regions. The U.S. market makes up approximately 50% of the company's income, while the European market is responsible for 30% of the income.

A Big Supplier with Big Numbers

MGA offers an ample range of products to its customers. Hence, this diversified company is one of the biggest global auto parts suppliers. Ford Motor Co (F), General Motors Co (GM),Volkswagen AG (VLKPY), and Bayrische Motorwerke AG (BMW - XTER) are some of its biggest customers, and responsible for 80% of total revenue.

The company operates in the U.S., Europe, Asia and South America, among others. In addition to this, the automotive industries of North America and Europe are recovering from the plummeting they experienced a few years ago. The revamped economic environment is thus largely responsible for the operating income increase of 50.7% in comparison to last same-year quarter.

The rising tendency of revenue and net income also demonstrate the firm’s strong financial position. Magna claimed a 39.5% rise in adjusted earnings per share in last year’s fourth quarter, while revenue also increased and rose to $9.2 billion or 14.2%.

Magna's Strong Financial Performance

Good financial performance is shown by a low-leveraged balance sheet and strong cash flow generation. In fact, MGA's operating cash flow rose significantly last year, to $1.3 billion in just nine months. This advantageous position results in expedite regular capital deployment and as mentioned above, in a 19% or $0.38 quarterly dividend per share.

The company's strong financial performance has also allowed for a noticeable share repurchase program, which Magna is currently implementing. Throughout 2013 the board of directors authorized a share repurchase program for $1.0 billion. This year, the board enabled another program to repurchase 12 million common shares (round 5.4% of the public float) with the intention to reward shareholders with increased value.

A Profitable Future Ahead

Having an EBITDA growth of 120.6%, that ranks in the top 1% of the industry, makes me feel very bullish about this stock. In addition, the 19.1% revenue growth demonstrates a good tendency to boost the company's value and income for the following years. In 2014, total revenue is expected to be between $33.8 billion and $35.5 billion.

It is also very important to note, that the financial performance is also expected to continue improving. The operating margin is now 5.7% and is projected to be around 6.5% by the end of the year. And, for shareholders and future investors, the ROE of 5.7% is tempting.

Gurus like Joel Greenblatt (Trades, Portfolio) and Scott Black (Trades, Portfolio) have also seen a great investment opportunity in this stock. This why they added a good amount of MGA´s shares to their respective portfolios. Finally, considering shares can be purchased at a price discount relative to the industry average, I feel Magna represents a solid investment opportunity with a profitable outlook.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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