Forget Magna International Inc.: Invest in Martinrea International Inc. Instead

Martinrea International Inc. (TSX:MRE) reported strong quarterly results with increasing margins and cash flow.

| More on:
The Motley Fool

Martinrea International Inc. (TSX:MRE) reported its first-quarter results today, and they were above expectations. Management highlighted the fact that the future is looking bright.

While sales declined 3.7% to just over $1 billion due primarily to weakness in North America, it is worth noting that a big chunk of the weakness was due to foreign exchange translation, which had an approximate $33.7 million drag on sales. Also, sales in Europe were a positive this quarter; sales increased a healthy 4.6% due to increased tooling sales, increased production from its new facility in Spain, and higher volumes in Germany. Although Europe represents only 17% of sales, the increase is definitely a success for the company.

Martinrea made good progress in increasing margins and efficiencies across the company. the gross margin was 11.8% in the quarter — a full percentage point increase from the same period last year, and selling, general, and administrative expense fell 2.2%. For comparison purposes, and to illustrate how effective the company has been in increasing margins, we should note that 2016’s gross margin was 10.9% — up from 10.4% in 2015 and 9.7% in 2014.

Looking at the cash flow statement, we see that the company generated almost $107 million in the quarter, which represents a healthy 11% of sales. Free cash flow was $20 million.

Balance sheet strengthening

The company’s long-term debt declined $30 million to $667 million, and its long-term debt-to-equity ratio declined to 77% from 84% last year. The ratio is high, but it’s manageable considering the amount of free cash flow the company is generating.

Valuation remains attractive

The stock trades at a P/E ratio of 7.3 times last year’s earnings and 6.2 times this year’s expected consensus earnings, despite its 18% expected 2017 earnings-growth rate, and it trades at 1.1 times book value with an ROE of 11.5%. With free cash flow of $33 million in 2016 and $20 million in the first quarter of 2017, and improving margins, it is my view that this is a very cheap stock despite yesterday’s run-up.

Comparing this to Magna International Inc. (TSX:MG)(NYSE:MGA), we see that Magna trades at a P/E of over 10 times last year’s and this year’s earnings, and it has a 7% consensus earnings-growth rate expectation for this year. And although Magna has a very healthy ROE and less debt, the company appears to have less room for margin improvements at this point, and it has been performing below expectations. Magna will be reporting its first-quarter results on May 11.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any stocks mentioned. Magna International is a recommendation of Stock Advisor Canada.

More on Investing

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Bank Stocks

Best Stock to Buy Right Now: TD Bank or Manulife Financial?

Manulife continues to see momentum in its business and stock price, while TD Bank stock remains down and out.

Read more »

cloud computing
Tech Stocks

3 No-Brainer Tech Stocks to Buy With $1,000 Right Now

These three Canadian tech stocks could be among the best growth opportunities in the market right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

Canadian Dollars bills
Metals and Mining Stocks

2 Cheap Canadian Stocks Under $20 to Buy This November

Cheap TSX stocks such as Endeavour Silver are trading at an attractive valuation in November 2024.

Read more »

happy woman throws cash
Tech Stocks

3 Growth Stocks That Could Be Long-Term Wealth Creators

These three growth stocks aim to grow their financials at a higher rate than the industry average, thus delivering superior…

Read more »

how to save money
Bank Stocks

This 5.9% Dividend Stock Pays Cash Every Month

First National Financial (TSX:FN) has a 5.9% yielding dividend that is paid out monthly.

Read more »

gift is bigger than the other
Investing

The Best Canadian Stocks to Buy With $5,000

These Canadian companies have solid growth prospects and the ability to deliver profitable growth even at a large scale.

Read more »