Recent Buy – Magna International

Magna InternationalMy first purchase of 2015! I added to my position in Magna International Inc (MG.TO) (MGA). 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).

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. I added 10 shares of MG.TO to my portfolio (bringing my total to 25 shares) at a price of CAD$123.50, which adds (approx, because dividends are declared in US$, but converted when payed out for the Canadian listed stock) $17.20 to my FY annual dividends.

Recent Buy Decision

  • Not much has changed in the fundamentals since I first added this company to my portfolio in November 2014.
  • Considering that it is a globally diversified company, with the bulk of the operations the US (51% of the revenue), I get more US and International exposure by investing in a Canadian company. This is part of my plan on leveraging the strengthening US dollar (I will have a separate blog post on this in the coming days).
  • I wanted to add to my position before the next dividend increase announcement in March 2015.

From my Nov 2014 post, the following points are what attracted me first to Magna International.

  • 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.
    • Great fundamentals: P/E = 12.55, Forward P/E = 10.29, PEG = 0.80.
    • Analysts expect earnings to grow by 15% for the next five years.
    • Low debt: Debt/Equity = 0.12
    • Dividend payout ratio = 18.5%
    • Dividend grower for 5 years, with a 5-yr DGR of 76%
  • 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 or other slowdowns will affect the company’s finances.

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: $104.98
  • 52-week range: $78.89 – $114.48
  • P/E: 12.55
  • Forward P/E: 10.29
  • PEG ratio: 0.80
  • Debt-to-Equity: 0.12
  • Yield: 1.46%
  • Payout ratio: 17.40%
  • 5-yr DGR: 76%

My portfolio is available here.

19 thoughts on “Recent Buy – Magna International

  1. R2R,

    Seems like a great buy here. The fundamentals are really solid across the board. I haven’t really run into Magna before, but it seems like a high-quality company to me.

    It’s interesting that Morningstar has the fair value pegged at only $65 per share for the US shares (they’re currently trading for $106). I haven’t done an analysis myself, but that would indicate it’s one of the most overvalued stocks that I’ve ever come across. Very strange, because the numbers seem to indicate a solid valuation here. Can’t say I’ve ever seen anything like that before.

    Wish you much luck with it. I may have to take a look at it as well. 🙂

    Cheers!

    • Mantra,
      Thanks for the lookup and sharing the info. I havent looked at the Morningstar fair value estimate. Is that available for the public or do you have to pay for it? Im not sure how they got to the $65 value – which seems to be unrealistically low to me. Just the book value is $42.76, which results in a Graham Number of $89.31. Compared to the Graham number, the current stock price of $106 seems a bit high, but the rest of the fundamentals are already pretty low such as PE, F P/E, PEG etc. With 5y earnings growth at 15%, I think the stock is undervalued at $104-$106 level.

      The yield is pretty low though, but hopefully they will raise it fast. Of course, the 76% dividend growth rate is not sustainable and is a result of the huge growth in dividends in 2010. 1 and 3-yr DGRs stand at 18.8% and 15% respectively.

      cheers
      R2R

    • I think its seriously undervalued…so, I decided to add here. The 76% isnt sustainable, but I wanted to add to my position before the March dividend increase announcement.

      Thanks for stopping by
      R2R

  2. R2R,

    I never really thought about this company until you mentioned it, which is surprising because I’ve got family that works at Magna here in Canada. They’re always travelling internationally too (China as you mentioned especially), so I’ll definitely be asking him what his thoughts are about the company’s outlook the next time I see them.

    • DA,
      Let me know what you find out 🙂 Always good to hear people’s thoughts first hand – either who are customers or employees who have information about the matter.
      The financials look great and I think they have a bright future ahead of them. Hopefully my investment will pay off…esp since its a low yield high growth company.

      cheers
      R2R

  3. RM2R,

    Interesting… never heard of them! Those dividend metrics seem wild! That growth rate…whoa. Fundamentally looks sound from a financial perspective. I hope you well with it and nice job adding to your current/projected income going forward with this – making moves roadmap!

    -Lanny

    • Lanny,
      The growth rate is because of the enormous increase in dividends in 2010. That rate will drop off next year to something a bit more realistic and sustainable in the mid-teens possibly.
      I think their competitors are companies like GPC and JCI…but a bit more diversified.

      Thanks for stopping by
      R2R

  4. R2R – I must admit that I am not really familiar with Magma but it sure seems like a great company with multiple operating groups and solid customers. Best wishes with your recent buy. I especially like the 5-yr growth rate while still maintaining a low payout ratio. AFFJ

    • AFFJ,
      Magna is a bit of a darling in the industrials/cons. disc sector here in Canada. The company is a component of the S&P/TSX 60. They have a very strong customer base and like I said, they make parts for almost every major car manufacturer in the world.

      Thanks for stopping by
      R2R

  5. Thanks for sharing this recent buy with us. It follows a recent article I wrote about the retail automobile parts and accessories sector. Based on what you wrote the company seems to be standing on some pretty solid legs with a dividend you can get excited about too. Thanks for introducing me to a new dividend payer!

  6. R2R…

    Nice idea, nice entry point. Company has an estimated one year cap gain of 14.5% and a yield of 1.5% for a ROIC of 16%. It also has a 3 year DivGR of 14.18%. Congrats. You may have a real winner there!

    Respectfully,
    Dennis McCain.

  7. M says:

    This certainly seems like a great buy according to your analysis. It’s not a company I know of, although I am interested in the automotive sector right now.

    Best Wishes,

    M

    • M,
      Magna has a big exposure to Europe as well – as their customers are a lot of the EU car manufacturers as well. Its an alternative to betting on one automotive company to do well than others – with this investment, no matter which car folks buy – it probably has a Magna component in it 🙂

      Best wishes
      R2R

  8. Hi, Roadmap2Retire.
    Thanks for the analysis on Magna. This is one I’ll definitely have to check out. I’m digging the website & the portfolio. Best wishes for continued success.

    Goosemann Jones
    Flight to Dividends Blog

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