Management consultant PRTM recently released its annual auto supply study examining the top 100 global players. One of the main findings is that North American and European auto suppliers increased EBITDA by 76% in 2009 and 68% in 2010. Thanks to this turnaround, Magna International (NYSE:MGA) and competitors such as Illinois Tool Works (NYSE:ITW), Cummins (NYSE:CMI), PPG (NYSE:PPG) and Lear (NYSE:LEA) are likely candidates to be consolidating smaller players as the car business continues its globalization. While it's hard to tell who'll be the winners and losers, I have three reasons why owning Magna stock is a winning proposition.
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In an effort to be where the car companies are, Magna announced August 5 that it would build 38 plants around the world by the end of 2013 with four in Mexico, five in North America and the rest in China, India and Brazil. Once it completes all 38 plants, 23% of its manufacturing facilities will be outside North America and Europe. Bank of Nova Scotia's (NYSE:BNS) "Global Auto Report" said that global auto sales for the first half of 2011 grew 5% and should do better than that in the second half of the year. Leading the way, not surprisingly, are the BRIC countries. China will sell 10.4 million cars this year, an increase of 11% over 2010, and 25 million annually by 2020. India will sell two million cars in 2011 and double that amount by 2020. Russia's first half sales increased a whopping 56% year-over-year and lagged Germany by only 390,000 units. Finally, Brazil's expected to grow auto sales 8.2% to 2.91 million cars despite auto loan rates of 30%. As a group, the four countries will account for 30% of the world's auto sales and Magna's moving fast to address this reality.
Magna announced its second quarter results and there was some good news mixed in with some bad. The good news is that overall sales increased 24% to $7.3 billion and all three geographic regions (North America, Europe and rest of the world) saw positive sales gains in the quarter. Unfortunately, profits took a pounding with the gross and operating margins declined 190 basis points and 130 basis points respectively. Analysts were expecting $1.36 a share and it delivered $1.15 for an 15% miss. Its stock dropped 11% August 5 on the bad news and another 11% the following Monday when the markets were in freefall. By the end of the week, it managed to recover about half the loss. Where it trades going forward is anyone's guess. All I know is it was at a high of $54.44 as recently as June 30. That's about a 28% drop in less than two months compared to 11% for the index. Europe is holding its stock back and that's ok. Eventually it will figure out what's wrong with its exteriors and interiors business and produce a profit. Until then, it's an opportunity to buy the stock cheap.
Canadian MoneySaver magazine's July/August issue talks about Ben Graham's simple way, an idea discussed in a 1976 article he wrote. Graham suggested that investors find stocks whose earnings yield wax double the average yield on long-term AAA corporate bonds. That's about 10% today. The second criterion was stocks with leverage ratios of two or less. The leverage ratio is total assets divided by shareholder equity. Graham saw these two rules as a simple way to find large companies with significant margins of safety. Magna qualifies with an earnings yield of 11.3% and a leverage ratio of 1.7. Its P/E ratio is lower now than it's ever been despite the fact a turnaround in the automotive industry is clearly taking hold. Its net cash position of $1.6 billion gives it the flexibility in coming years to make the moves necessary to keep it growing whether by acquisition or internally. Its forward dividend yield is 2.6% with a payout of approximately 21%, leaving it plenty for the business. Its stock has had two excellent bounce back years in 2009 and 2010, and, down 24% year-to-date, it's not likely to have a third. But it could come close. It all depends on where the markets go in the last four months of the year.
Whatever happens, if you have a 3-5 year window, now is an ideal time to buy. (For additional reading, take a look at Analyzing Auto Stocks.)
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