Magna International (TSX:MG) is a Canadian automotive parts manufacturer with 344 manufacturing facilities and 104 product development, engineering, and sales centres across 29 countries. The company has been under pressure over the last three years as COVID-induced restrictions, microchip shortage, inflation, and higher European energy costs weighed on its financials and stock price. It has lost nearly 40% of its stock value compared to its all-time high.
However, with the improvement in the macro environment, let’s assess whether investors could start accumulating the stock at these discounted prices. First, let’s look at its third-quarter performance.
Magna International’s third-quarter performance
After a challenging 2022, Magna International has substantially improved in 2023. Its revenue in the first three quarters increased by 14% to $32.3 billion amid an 8% increase in global light vehicle production. Further, its EBIT (earnings before interest and tax) grew by 30.8% to $1.7 billion. Higher sales and improvement in productivity and efficiency drove its EBIT. However, the negative impact of acquisitions and divestitures and higher other expenses due to the launch of the new assembly business offset some of the increases.
Meanwhile, the company generated a net income of $942 million or diluted EPS (earnings per share) of $3.29. However, after removing special items, its adjusted EPS for the first three quarters was $4.15, a 26.1% increase from the previous year. Further, the company generated $2.27 billion of cash from its operations before changes made to its assets and liabilities.
The company ended the third quarter with a liquidity of $4.5 billion, while its adjusted debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) ratio was at two. Further, the company expects the ratio to fall below two in the fourth quarter. So, the company’s financial position also looks healthy.
Meanwhile, Magna International’s management raised its 2023 guidance while reporting its third-quarter performance. Now, the management expects its 2023 topline to be between $42.1 billion and $43.1 billion. The midpoint of the guidance represents a 12.6% increase from the previous year. Further, its EBIT margin could come between 5.1-5.4%, a substantial improvement from 4.4% in 2022.
Now, let’s look at its medium- to long-term growth prospects.
Magna’s long-term growth prospects
With the automotive industry undergoing a drastic change, Magna International is aggressively investing in high-growth segments, such as powertrain electrification, battery enclosures, and active safety. Bolstered by these investments and growing demand, the company expects its revenue from these segments to grow at a CAGR (compound annual growth rate) of 35%, 75%, and 45%, respectively. Further, its new mobility sales could touch $300 million by 2027.
Further, the shift towards high-growth segments and operational excellence could expand its margins. The company’s management expects a 150 basis point improvement by 2027. So, the company’s outlook looks healthy.
Investors’ takeaway
Amid the weakness, Magna International trades at an attractive valuation. Its NTM (next 12-month) price-to-sales and NTM price-to-earnings multiples stand at 0.4 and 9.1, respectively. It pays a quarterly dividend of $0.46/share, with its forward yield at 3.33%. Given its improving financials, healthy growth prospects, and attractive valuation, I believe Magna International would be an excellent buy right now.
