Contributing editor Glenn Rogers is back from his African safari and immersing himself in the markets again. This week he takes a close look at the automotive industry and finds a Canadian company he believes will do well in 2014. Glenn is a successful businessman, entrepreneur, and investor who has worked in both Canada and the U.S. He lives in southern California. Here is his report.
Glenn Rogers writes:
With the Detroit Auto Show underway I thought it would be a good time to look at the suppliers to the automotive industry. It's coming off a good performance in 2013 and is projected to have a solid year in 2014 as well.
A number of companies in this segment look interesting but quite a few of them have seen their share prices move higher and seem to be at fair value, at least for now. I own Johnson Controls (NYSE: JCI) along with Ford (NYSE: F) and General Motors (NYSE: GM) but one stock I had thought about buying for a long time seems to stand out as being undervalued. That stock is Magna International (TSX:MG, Financial), (MGA, Financial).
Since the company is based in the Aurora, Ontario, Canadian readers will be familiar with it. It was founded by well-known entrepreneur Frank Stronach who, along with his daughter Belinda, (who came along much later) ran the business from its creation until recently.
No one can deny that Stronach built a large, successful business (Magna has 123,000 employees worldwide). But in recent years, horse racing, politics, and other projects not related or helpful to the automotive business occupied a large amount of his time. Last year he agreed to sell his voting shares and that deal will be completed in 2014.
The sale is positive news for Magna shareholders. After the Stronach buyout, the company will have a clean balance sheet with only $96 million in debt and over $1 billion in cash (as of the end of the third quarter). This gives Magna considerable financial flexibility and should lead to continued friendly shareholder activity like dividend increases and stock buybacks.
The company was founded in 1961 has grown to a global enterprise with manufacturing operations around the world. It operates in 29 countries with over 300 manufacturing centres and nearly 100 engineering, development, and sales centres.
The company produces a huge variety of components for the automotive industry. These include everything from electronic systems, powertrain systems, body and chassis components, fuel and battery systems, seating systems, and more. I believe this is the most diversified supplier within the automotive industry. Of course, that means the company is fully dependent on the fortunes of the automotive sector but fortunately that industry is doing well and appears to be on track for several more years of growth.
Magna reported third-quarter 2013 results that showed sales increases year-over-year of 13% to $8.34 billion (note that Magna reports in U.S. currency). Adjusted EBIT increased 26% to $444 million compared to $352 million in the third quarter of 2012. Sales have more than doubled since 2009.
Magna achieved these results despite the fact that Europe was still experiencing tepid growth and Europe represents 40% of the company's revenue. Magna expects to take $100 million in restructuring costs in Europe in their final 2013 results.
North America represents 52% of the company's sales and that looks solid for 2014. They did report a loss in South America but the rest of the world is profitable and the company continues to make major investments in their manufacturing capability, particularly in the Asia Pacific region.
During the quarter the company bought back nearly four million common shares. That completes the repurchase of 12 million shares, which represented over 5% of the public float. The CFO has indicated that a dividend increase is on the way.
The stock looks inexpensive when compared to the industry average of just under 15 times earnings and the current Standard & Poor's 500 level of nearly 16 times. Magna trades for under 11times forward earnings and is growing at a very nice rate.
The average earnings estimate by analysts for the 2014 fiscal year is $7.73 per share. If Magna's multiple increases to 14 times, which is still below the sector average, it implies a stock price in the range of US$108. The shares closed Friday at C$95.95, US$86.56.
The stock pays a quarterly dividend of US$0.32 a share (US$1.28 annually) to yield 1.5% at the current price.
One final note. Magna recently provided guidance for 2014 sales that was slightly below analyst's expectations. They are expecting $33.8 to $35.5 billion in sales, below consensus of $36.2 billion. The market shrugged this off and shares closed 1.08% higher on the news.
If they hit the forecast numbers it will represent a 6% increase in sales but my guess is that profits will increase by a larger number than that, assuming Europe continues to improve, which appears likely.
Action now: Buy with a target of C$110, US$100.
Glenn Rogers writes:
With the Detroit Auto Show underway I thought it would be a good time to look at the suppliers to the automotive industry. It's coming off a good performance in 2013 and is projected to have a solid year in 2014 as well.
A number of companies in this segment look interesting but quite a few of them have seen their share prices move higher and seem to be at fair value, at least for now. I own Johnson Controls (NYSE: JCI) along with Ford (NYSE: F) and General Motors (NYSE: GM) but one stock I had thought about buying for a long time seems to stand out as being undervalued. That stock is Magna International (TSX:MG, Financial), (MGA, Financial).
Since the company is based in the Aurora, Ontario, Canadian readers will be familiar with it. It was founded by well-known entrepreneur Frank Stronach who, along with his daughter Belinda, (who came along much later) ran the business from its creation until recently.
No one can deny that Stronach built a large, successful business (Magna has 123,000 employees worldwide). But in recent years, horse racing, politics, and other projects not related or helpful to the automotive business occupied a large amount of his time. Last year he agreed to sell his voting shares and that deal will be completed in 2014.
The sale is positive news for Magna shareholders. After the Stronach buyout, the company will have a clean balance sheet with only $96 million in debt and over $1 billion in cash (as of the end of the third quarter). This gives Magna considerable financial flexibility and should lead to continued friendly shareholder activity like dividend increases and stock buybacks.
The company was founded in 1961 has grown to a global enterprise with manufacturing operations around the world. It operates in 29 countries with over 300 manufacturing centres and nearly 100 engineering, development, and sales centres.
The company produces a huge variety of components for the automotive industry. These include everything from electronic systems, powertrain systems, body and chassis components, fuel and battery systems, seating systems, and more. I believe this is the most diversified supplier within the automotive industry. Of course, that means the company is fully dependent on the fortunes of the automotive sector but fortunately that industry is doing well and appears to be on track for several more years of growth.
Magna reported third-quarter 2013 results that showed sales increases year-over-year of 13% to $8.34 billion (note that Magna reports in U.S. currency). Adjusted EBIT increased 26% to $444 million compared to $352 million in the third quarter of 2012. Sales have more than doubled since 2009.
Magna achieved these results despite the fact that Europe was still experiencing tepid growth and Europe represents 40% of the company's revenue. Magna expects to take $100 million in restructuring costs in Europe in their final 2013 results.
North America represents 52% of the company's sales and that looks solid for 2014. They did report a loss in South America but the rest of the world is profitable and the company continues to make major investments in their manufacturing capability, particularly in the Asia Pacific region.
During the quarter the company bought back nearly four million common shares. That completes the repurchase of 12 million shares, which represented over 5% of the public float. The CFO has indicated that a dividend increase is on the way.
The stock looks inexpensive when compared to the industry average of just under 15 times earnings and the current Standard & Poor's 500 level of nearly 16 times. Magna trades for under 11times forward earnings and is growing at a very nice rate.
The average earnings estimate by analysts for the 2014 fiscal year is $7.73 per share. If Magna's multiple increases to 14 times, which is still below the sector average, it implies a stock price in the range of US$108. The shares closed Friday at C$95.95, US$86.56.
The stock pays a quarterly dividend of US$0.32 a share (US$1.28 annually) to yield 1.5% at the current price.
One final note. Magna recently provided guidance for 2014 sales that was slightly below analyst's expectations. They are expecting $33.8 to $35.5 billion in sales, below consensus of $36.2 billion. The market shrugged this off and shares closed 1.08% higher on the news.
If they hit the forecast numbers it will represent a 6% increase in sales but my guess is that profits will increase by a larger number than that, assuming Europe continues to improve, which appears likely.
Action now: Buy with a target of C$110, US$100.
