Recent Buy – Magna International

Magna International One of my favorite series of posts is when I add more capital to work and introduce a new stock to my portfolio. Here is my recent buy: I initiated a position in Magna International Inc (MGA) (MG.TO). Magna is a globally diversified automotive supplier headquartered in Aurora, Ontario, Canada.  In 2012 it was the largest automobile parts manufacturer in North America by sales of original equipment parts. Its operating groups include Magna Steyr, Magna Powertrain, Magna Exteriors, Magna Interiors, Magna Seating, Magna Closures, Magna Mirrors, Magna Electronics and Cosma International. Customers include General Motors (GM), Ford Motor Company (F), Chrysler LLC, Tesla (TSLA), BMW, Mercedes-Benz, Audi, Volkswagen, Land Rover, Toyota, and Honda to name a few (the customer list is too long from different divisions to include all names).

The company was founded by the Austrian-Canadian businessman and politician Frank Stronach. As of last year, he was ranked 19th wealthiest Canadian with a net worth of CAD $3.12B. Stronach founded the company in a Toronto garage in 1957, was chairman and CEO for decades and began the transition process to hand over the reigns in 2010 after a controversial $860M buyout of the multiple voting shares with which he controlled the company. In 2013, Magna paid him $52M (2.25% of Magna’s pre-tax profit) for consulting work and has indicated that 2014 will be the last year they will have him on the payroll. The company is now headed by Donald Walker, who has been in the industry for 34 years and with Magna  for 27 years.

Because all numbers reported by Magna Internatonal are in US$, this article unless otherwise specified uses US$. However, for my investment, I bought the Canadian listed stock (MG.TO) to avoid currency conversion hits.

Corporate Profile (from Yahoo! Finance)

Magna International Inc. develops, manufactures, engineers, supplies, and sells automotive products. It operates through North America, Europe, Asia, and Rest of World segments. The company offers body, chassis, and renewable energy systems; powertrain systems, such as driveline systems, fluid pressure and controls, metal-forming solutions, and engineering services and system integration solutions; and exterior systems consisting of front and rear end fascia systems, exterior trims, modular systems, class A composite panels, structural components under hood and underbody components, and sheet molding compound materials. It also provides seating systems, including complete seating systems, mechanism and hardware solutions, specialty mechanism solutions, and seat structures, as well as foam and trim products; interior systems, such as sidewall and trim, cockpit, cargo management, and overhead systems; fuel, battery, and roof systems; and vision systems comprising interior and exterior mirrors, actuators, electronic vision systems, and door handle and overhead console systems. In addition, the company offers closure systems comprising door modules, window systems, power closure systems, latching systems, handle assemblies, driver controls, obstacle detection systems, engineering glasses, and sealing systems, as well as testing services for window regulators, wiper systems, door modules, cables, door latches, and closures. Further, it provides electronic systems, including eyeris – driver assistance systems, intelligent power systems, body electronics and HMI, engine electronics and liquid sensors, as well as industrial products, such as joysticks and electronic units for fork lifts; and vehicle engineering and contract manufacturing services. The company was founded in 1957 and is headquartered in Aurora, Canada.

Financials

Like any other company during the financial crisis, Magna suffered badly. Magna was affected seriously after two of its major customers – General Motors and Chrysler both filed for bankruptcy. The revenue dropped and the earnings and free cash flow followed downward. However,  Magna remained resilient and bounced back and got the books in order; things started looking up in 2010. The company has more than doubled its revenues from the lows of 2009.

MGA - Rev, EPS and FCF

Magna International – Revenue, EPS and FCF per share

MGA - Shares Outstanding Magna International has a surprisingly low number of shares for a company with a market cap of $21B. The company has reduced the number of outstanding shares after a peak in 2011 – with a current share count standing at 220M. Earlier this month, Magna announced that the company will be further reducing the share count by authorizing a buyback program of 20M shares (about 9.8% of outstanding shares).

Dividends

Magna International Inc has paid dividends since 1993, but had to cut them first in 2007, saw a small increase in 2008 and then drastically cut again in 2009 after some of its main customers – GM and Chrysler filed for bankruptcy. However, things have turned around and the company has started raising dividends again. Magna currently pays $1.52 in annual dividends, which at current market price represents a yield of 1.46%. Magna usually announces increase in the first quarter of the year, typically in March. Magna has a dividend increase streak of 5 years, with a 5-year dividend growth rate (DGR) of 15.2%! The current payout ratio is 18.5%.

Magna - Dividends

Magna International – Dividends

Even though a Canadian company, Magna announces and pays out its dividends in US$. Holders of the Canadian listed shares (MG.TO) will be paid the equivalent amount based on the record date’s conversion rate.

Recent Buy Decision

  • Magna International Inc is a strong industrial company (although the official categorization is Consumer Discretionary) with a great track record.
  • Automotive customers with a worldwide customer base – customers include almost every major car manufacturer in the world.
  • Global revenue diversification. According to the 2013 annual report, the revenue breakdown is as follows: 51% from N.America, 41% from Europe, 4.4% from Asia-Pacific and 6% from other. The company is also expanding its operations in Asia. Magna is established and operational in China for over a decade now and in September 2014 announced opening two new facilities in India.
  • Solid fundamentals. Looking over the books, its really hard to find a bad spot in the metrics for the company’s valuation.
    • Revenue of US$36.5B and only 220M shares. Revenue per share is actually more than the share price! I cant recall if I’ve ever seen a company with a number like that.
    • P/E = 13.91, Forward P/E = 10.31, PEG = 0.89. Analysts expect earnings to grow by 12% for the next five years.
    • P/B = 2.3, Book value = $44.44, Graham number = $91.10.
    • Debt/Equity = 0.11
    • Dividend payout ratio = 18.5%
  • The company also announced a buyback program of 20M shares, which is approx 9.8% of its total outstanding shares.
  • According to my dividend stock analysis, using a variety of different valuation methods – the fair value is $132.42, which means the stock is currently 20% undervalued.

Risks

While the revenue is well diversified, both in customer base and geographical perspective – slowdowns and bankruptcies in the the auto industry could provide problems for the company. A severe recession such as recent financial crisis will affect the company’s finances as seen in the charts above.

Conclusion

 Magna International Inc is a well run global company and a leader in the field. The customer base includes almost every major automaker in the world and is well diversified geographically. The company has a bright road ahead with established and new operations in emerging economies like China and India. The stock may have a low starting dividend yield, but the low payout ratio suggests that those dividends can grow at a rapid pace in the coming years.

Summary of the stock:

  • Symbol: MGA (also trades as MG on TSX)
  • Quote: $104.07
  • 52-week range: $74.93 – $114.48
  • P/E: 13.91
  • Forward P/E: 10.31
  • Debt-to-Equity: 0.11
  • Yield: 1.46%
  • Payout ratio: 18.5%
  • 5-yr DGR: 15.2%
  • Book Value: $44.44
  • Graham Number: $91.10

Further Reading

As a bonus, I have decided to include links to more literature if you are interested in discovering this company.

13 thoughts on “Recent Buy – Magna International

  1. Interesting buy with Magna International. Personally I have been staying away from the auto industry overall but maybe I need to re-evaluate again. People need cars sooner or later. Will be monitor Magna moving forward. Thanks for sharing.

    • Hi Tawcan,
      Ive stayed away from the auto parts so far. But instead of looking at one of the big manufacturers and betting on them doing well, I decided that going with a OEM parts maker better resonates with me. The way I see it is – its similar to my investment philosophy in Qualcomm. No matter which device people buy – Apple, Android, Windows, Other – theres always QCOM technology involved and QCOM gets a cut from the sales (either as a part or as a licensing fee) – and I get a part of that pie. Similarly, no matter which car people buy – theres probably a part of it that comes from Magna. Some cars are manufactured wholly by Magna under contract but for most cars, it could be either interiors, exterior or electronics or some other tiny part like the mirrors on the car. Whether people buy a GM car or a BMW, Magna gets a piece of the pie 🙂

      R2R

    • Henry,
      GPC is a great company too – and yes I think MGA and GPC compete in some form. GPC seems to be a bit more diverse and not just limited to autoparts…they have divisions in auto service, industrial parts, office supplies and electrical/electronic materials as well. I think its a great company and would at some point like to add it to my portfolio, but most of its metrics suggest that its overvalued/expensive. PE 22, Forward PE 20, PB 4.4 etc. I think part of the reason is that GPC is a dividend champion and well covered. MGA currently is more of a value investor’s find.

      Hope that helps
      R2R

  2. Very interesting purchase and valuation R2R! I have always stayed away from the auto industry as well but MG looks like it is something worth looking into. Investing in the auto parts industry may just give my portfolio the exposure into the auto industry. I have thought about investing in GM though but the price is currently too high for me to initiate a position in.

    • Jeff,
      Investing in the car manufacturers themselves isnt as lucrative and I have avoided it as well. I looked at GM and Ford in the past and found that they werent good investments for me. An OEM manufacturer like Magna – I can totally get on board with that company.

      R2R

  3. Nice writeup. A while back Autoliv (ALV) was selling at what I thought was a bargain ($50’s) but the risks you mentioned were the one thing preventing me from purchasing it. The same holds true today.

    • By limited number of automakers, are you referring to the fact that even companies like GM and Chyrsler can go bankrupt, so it can affect Magna’s revenue? Yes…that is possible indeed.

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