Company Overview: Magna International Inc. (Magna) is a mobility technology company. The Company’s segments include Body Exteriors & Structures, Power & Vision, Seating System and Complete Vehicles. Its product capabilities include body, chassis, exterior, seating, powertrain, active driver assistance, electronics, mirrors & lighting, mechatronics and roof systems. Its products include sealing systems, sliding folding and modular roofs, active aerodynamics, lightweight composites, fuel systems, engineered glass, body systems, electronic controllers, interior mirrors, exterior mirrors, tail lamps, small lighting, seat structures, door systems, power closure systems, mechanism & hardware solutions, foam & trim products, complete vehicle manufacturing, engineering services and fuel systems.

Stocks’ Details

Magna International Inc.

Higher Demand for Product Suite & Go-to-Market Strategy are Key Catalysts: Based in Aurora, Canada, Magna International Inc. (TO: MG) is engaged in manufacturing and supplying of comprehensive automotive components. The company is engaged in designing, developing & manufacturing of assemblies, automotive systems, modules, and components, for original equipment manufacturers (OEMs) of light trucks & cars. The company has more than 174,000 number of employees, with 348 assembly facilities. The company has strengthened its foothold in more than 28 countries with 91 product development, engineering and sales centres. Some of the customers of magna are General Motors, Fiat Chrysler N.V., Ford, BMW AG, Volkswagen AG and Daimler AG. The company reports under four operating segments namely Body Exteriors & Structures, Power & Vision, Seating Systems and Complete Vehicles.

In FY18, the company reported total sales of ~$40.8 billion, up 12% on year over year basis. The increase can primary be attributed to introduction of new programs and currency fluctuations. Further, higher sales from all the four operating segments positively impacted the yearly’s revenues.

Body Exteriors & Structures contributed 42.9% in Magna’s total sales of FY18. The segment designs and engineer’s chassis structures, body structures, exterior systems, Modules, and fuel systems. Power & Vision contributed 30.2% in Magna’s total sales of FY18. The segment is involved in mode vehicles move and interact development. Seating Systems (13.6% of total revenue) is engaged in innovation easy and safe vehicle interiors with adaptable configurations. Lastly, Complete Vehicles offers modular-based solutions for vehicle parts and systems. In 2018, the segment represented 14.7% of total sales. Moreover, the company continued to expand its geographic footprint in FY18. Magna operates across all the key markets, comprising of North America, Europe, South America, Asia and Africa. The company’s latest three joint ventures in China will assist the company to strengthen its foothold in the world’s largest new vehicle market.

The company witnessed a compound annual growth rate of ~4.4% in its revenue across FY14-FY18. The company witnessed continued growth in its four reportable segments, on the back of higher demand for its product suite of light weighting solutions, mechatronic products, dual-clutch transmissions, Advanced Driver Assistance Systems (ADAS), electrified products, seats and complete vehicle assembly. Moreover, faster and more responsive go-to-market methodology, along with higher investment to improve product portfolio in order to integrate further new technologies are key positives and will aid the company to generate organic revenue growth in FY20 & beyond. Notably, cash flow from continuing operating activities increased at a CAGR of ~7.1% across FY14-FY18. Dividend paid per share increased at a CAGR of 15% over the same time span.

Dividend (Source: Company Reports)

Overall Comparison From FY14-FY18 (Source: Company Reports)

Q3FY19 Financial Highlights for the period ended 30 September 2019: The company’s revenues fell 3% year over year to $9,319 million, primary due to unfavorable foreign currency conversion and divestitures. The company reported adjusted earnings of $1.41 per share, down from $1.56 per share reported in the year-ago quarter. The company reported adjusted EBIT of $558 million, a decline from $699 million reported in the year-ago period, on the back of General Motors strike coupled with net customer price concessions. As a percentage of revenue, adjusted EBIT came in at 6%, as compared to 7.3% reported in the year-ago period.

 Body Exteriors & Structures Segment: Revenues from this segment declined 5% on a year over year basis and came in at ~$4.2 billion in the reported quarter. The decrease can primarily be attributed to the General Motors strike, lower vehicle production, unfavorable foreign currency conversion, coupled with net customer price concessions. Segmental Adjusted EBIT stood $306 million, as compared to $326 million in the year-ago period, indicating lower scrap steel recoveries along with elevated commodity, warranty and launch costs.

Power & Vision Segment: Revenues from this unit stood at $2.7 billion, a decline from the prior-year figure of $2.9 billion, on the back of adverse foreign currency translation, lower vehicle production, net customer price concessions as well as the GM strike. Adjusted EBIT dropped from $259 million reported in the year-ago quarter to $167 million. Higher engineering and other related costs impacted the EBIT for the segment.

Seating Systems Segment: Revenues from the segment climbed 4% to $1.3 billion in the quarter, due to VIZA acquisitions and launch of new programs. Adjusted EBIT came in at $56 million during the quarter, as compared to $69 million recorded in the year-ago quarter. Lower sales from several facilities, along with elevated commodity costs, and operating inefficiencies were key negatives.

Complete Vehicles: Revenues increased 9% year over year to $1.5 billion, under this segment, largely driven by the launches of BMW Z4 and Toyota Supra programs along with constant rise of the Mercedes G-Class and Jaguar I-PACE. Adjusted EBIT grew 21% year over year and came in at $29 million. The increase was on the back of higher sales and decrease in launch and other costs.

3QFY19 Key Highlights (Source: Company Reports)

 Operating Highlights: During the quarter, operating income came in at $540 million, down from $676 million reported in the year-ago period. Selling and General administrative expenses decreased to $400 million from $403 million in the third quarter of 2018, primarily due to foreign exchange gains and divestitures along with synergies from acquisitions. The company reported adjusted net income of $438 million, down from $535 million in Q3FY18. The company declared a quarterly dividend of $0.22 per share, payable on January 22, 2020. During the quarter, the company repurchased 6.8 million shares worth $342 million. During the quarter, management declared a dividend of 36.5 cents per share.

Balance Sheet & Cash Flow Details: The company existed the quarter with cash and cash equivalents of $769 million, compared with $684 million as of December 31, 2018. Long-term debt at the end of the quarter amounted to $3,021 million, as compared to $3,084 million as of December 31, 2018. Cash flow from operations for Q3FY19 stood at $750 million, down from $1.08 billion at the end of third-quarter 2018.

Cash Flow Sneak Peak (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 26.84% of the total shareholding. T. Rowe Price Associates, Inc. is the entity holding maximum shares in the company at 6.43%. Beutel, Goodman & Company Ltd. is the second-largest shareholder, with a holding of 4.25%.

Top Ten Shareholders (Source: Thomson Reuters)

 Digging into Magna International’s Recent Updates:

On January 16, 2020, Magna stated that it is concluding the collaboration with Lyft to co-develop self-driving technology, in an attempt to focus on R&D spending in near-term programs.

On December 11, 2019, Magna inked a strategic alliance with Ferarri, to build next-generation, innovative, and advanced dual-clutch 8-speed transmission (DCT) for the Ferrari SF90 Stradale.

Key Metrics:  In FY18, the company had a gross margin and EBITDA margin of 14.1% and 10.1%, which was lower than the FY17 figure of 15.6% and 11.0%, respectively. Further, quick ratio and current ratio in FY18 stood at 0.82x and 1.15x, lower than the FY17 figure of 0.83x and 1.21x, respectively.

Key Metrics (Source: Thomson Reuters) 

Outlook: The ever-increasing demand for auto component from emerging economies such as Brazil, India, China, Asia, Middle East and Africa signifies massive growth opportunities for the industry participants. The addition of latest technologies like automation, digitization, machine learning, and artificial intelligence has heightened complexity in the working structure of automotive components. These obstacles necessitate high-priced aftersales services, thereby establishing new opportunities for auto equipment manufacturers to capitalize on.

The company recently updated the market with FY20 and FY22 financial view. The company expects FY20 sales to be in the range of $38-$40 billion. Production cuts by automakers across Europe and improving U.S. dollar are expected to ponder on Magna’s top line in 2020.  Body Exteriors & Structures and Power & Vision units’ revenues for FY20 are projected to be in the band of $16-$16.8 billion and $10.7-$11.3 billion, respectively. Seating Systems & Complete Vehicles segments revenues are likely to be in the ambit of $5.7-$6.1 billion and $6-$6.4 billion, respectively. The company expects capital expenditure for FY20 to be ~$1.7 billion.

The company expects net income for FY20 to be in the range of $1.8 billion and $2 billion, better than 2019 guided range of $1.8-$1.9 billion. Further, the company expects to fully offset higher costs with continuing margin-improvement. The company expects to bolster its margins in 2020, on the back of lower spending on ADAS, autonomy, coupled with operational improvement. EBIT margins for 2020 are likely to be in the range of 6.7-7.0%.

Going further, the company expects EBIT margin and sales to grow in 2022 on the back of new product launch and business development efforts. The company remains on track to focus on technology development and innovation for growth across all business segments. Products related with lower emissions position the company well for future growth.

For FY22, the company expects revenues to be in the range of $40.5-$43.5 billion, whereas EBIT margin is expected to be in the band of 7.6-8%, indicating an improvement from 2020. During the time span of 2020-2022, the company estimates free cash flow of $5.5 billion. The company remains dedicated toward enhancing shareholders via regular dividend pay-outs and share buyback programs.

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology:

 Method 1: Price to Earnings Multiple Approach

Price to Earnings Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Method 2: Price to Cash Flow Multiple Approach

Price to Cash Flow Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: As on 10 February 2020, the stock has a market cap of ~$20.7 billion with a P/E multiple of ~8.9x and an annual dividend yield of ~2.9%, suggesting a decent opportunity for accumulation. We have valued the stock using two relative valuation methods, i.e., P/E multiple and P/CF multiple, and for the said purpose, we have considered peers like BorgWarner Inc (N: BWA), Visteon Corp (O: VC) and Gentex Corp (O: GNTX), to name few. Therefore, we have arrived at a target price with an upside in mid teen (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the current market price of $67.7 per share, up ~0.03% on 10 February 2020.

MG Daily Technical Chart (Source: Thomson Reuters)

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