2-for1 Sale
Magna International (TSX:MG) has been under pressure over the last few years amid concerns over COVID-related restrictions, a microchip shortage, inflationary pressure, and higher European energy costs. The company currently trades at a 40% discount compared to its all-time high. With the improvement in the macro environment following the removal of COVID-related restrictions, easing inflation, and a decline in energy prices, let’s assess whether Magna International would be a buy at these levels.
First, let us look at its performance in the recently reported third-quarter earnings, which ended on September 30th.
Magna’s third-quarter earnings
In the third quarter, Magna International posted revenue of $10.7 billion, representing a 15% increase from the previous year’s quarter. The new program launches and higher global light vehicle production drove its sales. During the quarter, the company’s light vehicle production increased by 4% amid higher production in North America and Europe.
Further, the company generates $615 million of adjusted EBIT (earnings before interest and tax), representing a 36% increase from its previous year’s quarter. Its operational excellence, cost-cutting initiatives, and topline growth boosted its earnings. Meanwhile, its net income was $394 million and $1.37 per share. However, removing special items, its adjusted EPS (earnings per share) stood at $1.46, representing 32.7% year-over-year growth.
Further, the automotive parts supplier generated $797 million in cash from its operations before changes to its operating assets and liabilities. Its free cash flows were at $23 million, a substantial improvement from a cash burn of $210 million in the previous year’s quarter. It also ended the quarter with liquidity of $4.5 billion. The company’s financial position also looks healthy, with an adjusted debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of 2. Meanwhile, the company expects the ratio to fall to around 2 in the fourth quarter.
After reporting its third-quarter performance, the management also raised its guidance for 2023. Management now expects its 2023 topline to be between $42.1 billion and $43.1 billion, with the midpoint of the guidance representing a 12.6% increase from the previous year. Its EBIT margin could come between 5.1%–5.4%, an improvement from 4.4%.
Now, let’s look at its long-term growth prospects.
Magna’s growth prospects
Although the automotive industry faces challenges, such as rising labor wages, higher interest rates, geopolitical tensions, and a global economic slowdown, it is witnessing an incremental improvement with stable production schedules and resilient vehicle sales. Meanwhile, Magna International has accelerated the deployment of its investment in high-growth areas. Supported by these investments, the company’s management expects strong growth in the power train electrification, battery enclosures, and active safety segments over the next few years.
Besides, the company expects its new mobility sales to reach $300 million by 2027. The shift towards high-growth segments could improve margins and deliver higher shareholder value. Further, the company continues its operational excellence initiatives, which could expand its margins by 150 basis points by 2025. Considering all these factors, I believe the company’s medium-to-long-term growth prospects look healthy.
Bottom line
Amid the weakness over the last few years, Magna International trades at an attractive valuation. Its NTM (next 12 months) price-to-sales and NTM price-to-earnings multiples stand at 0.4 and 8.9, respectively. Besides, the company also pays a quarterly dividend of $0.46/share, with its forward yield at 3.4%. Considering its high growth prospects, attractive valuation, and healthy dividend yield, I believe Magna International would be an excellent buy.
