Performance: -28.6%
Toronto-listed Magna International was the bigger loser in our portfolio for the four-month period, with a 28.6% loss. The company is a global mobility technology company that is one of the world’s largest suppliers in the automotive space. Magna makes the body, exteriors and chassis, powertrain, active driver assistance, electronics, mechatronics, seating systems, roofing, and lighting systems and mirrors for the automotive industry.
The case for the company is that it is a play on the pandemic recovery, through the global demand recovery for the automotive industry. Magna’s position as a supplier of choice for automakers, along with its strong record of financial performance denotes that it is well-positioned to capture growing market opportunities and generate free cash flow. Magna is a key player in the value chain as it covers complete vehicles through its integrated systems, not just separate car parts.
The company’s offerings and services are also agnostic to the type of vehicles, as its portfolio covers internal engine combustion engine (ICE) vehicles to electric vehicles (EV). The company’s most recent financial period showed strong results, but the outlook from management was revised downwards. This was mainly due to its inflationary cost environment and rise in fuel prices which affects demand in the automotive industry negatively.
Supply chain constraints are also expected as long as the war between Russia and Ukraine persists, and the outlook for light vehicle production is forecast to be lower. However, the short-term rise in costs should be weighed against the longer-term prospects, such as partnerships with non-automotive software companies as part of establishing its position in the electric vehicle space. Joint ventures such as the one with LG Chem should help develop its autonomous technology, for example.
Though short-term concerns currently depress the price, we think this will not persist because it is based on short-term forecasts on vehicle sales, and this is further supported by the management’s view on the next financial year’s figures, which were not revised downwards. We think Magna can and will adapt to this, as it can focus on more profitable segments and control its costs.
See also: More upside for Indian equities despite rich valuations
At current prices, the company’s yields are attractive compared to the risk-free rate of 3.5%. Magna’s earnings yield, operating cash flow yield and free cash flow yield are 8.9%, 12.1% and 6.2% respectively. Compared to global peers, the company trades at a 7% and 4% discount for its forward PE and EV/Ebit, implying that is cheap based on current prices. The company’s balance sheet is sound, with a current ratio of 1.3 times, a debt-to-equity ratio of 0.48 times and an interest coverage ratio of 15.7 times, indicating good liquidity and solvency.
Sentiments-wise, there are 15 “buy” calls, four “hold” calls and one “sell” call on the company from analysts. The average target price for the company is almost 40% above its current trading price of C$71.51 ($76.54). Based on our revised in-house valuations, we think the company’s fair valuation is at least 35% above its current trading price.
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk.
