Magna International Inc. (TSX: MG) is engaged in the manufacturing and distribution of automotive components. Its segments include Body Exteriors & Structures, Power & Vision, Seating System and Complete Vehicles.

Key highlights

• Sequentially growing financials: While the global industry faced tremendous obstacles in 2021, such as a continuing pandemic, supply-chain disruptions, and semiconductor chip shortages, Magna forged ahead, providing new breakthroughs as automakers rush toward an electric future. It achieved good results, with full-year sales of USD 36.2 billion, up 11% from the previous year, along a 4% increase in global light vehicle manufacturing. The conservative actions made by management also contributed to an increase in adjusted EBIT margins and adjusted EPS on a sequential basis, which is commendable.

        Source: Company Filing

• Aiming to elevate free cash flows: When comparing 2021 to 2020, cash generated by operations fell to USD 2,940 million from USD 3,278 million. Lower cash generation stemmed from the negative impact of production disruptions caused by semiconductor chip shortages in 2021, including higher labor and other operational inefficiencies as a result of the uncertainty of its clients' manufacturing schedules. However, the firm intends to increase its free cash flows in the next couple of years, which is a significant plus. From FY 2022 to FY 2024, the firm anticipates free cash flow in the range of USD 5.75 - 6.25 billion.

         Source: Company Filing

• Strong Guidance: Despite present market constraints, the business expects a more favorable manufacturing environment to last through 2024. Approximately 90% of its 2024 sales have already been secured, and technical investments in megatrend sectors such as electric powertrains are projected to expand. The increase in investments for megatrend sectors will have an immediate impact on margins but will fuel growth in the long run. As a consequence, the business anticipates sales in the range of USD 44.6 – 47.1 billion in FY 2024, with EBIT margins increasing to 8.1% - 8.6%.

Source: Company Filing 

Risks associated with investment

The business of the company involves many risks which can impact its business operations as well as financials. Some significant risks are like deteriorating economic conditions, resulting in lower vehicle sales and production levels, commodities prices, inflation, foreign currency fluctuations, supplier’s issue, governmental regulation, etc. 

Financial overview of FY 2021

Source: Company Filing

• Sales increased 11% or USD 3.59 billion to USD 36.24 billion for 2021 compared to USD 32.65 billion for 2020 primarily as a result of higher global light vehicle production and higher assembly volumes.
• Cost of goods sold increased USD 2.89 billion to USD 31.10 billion for 2021 compared to USD 28.21 billion for 2020, primarily due to higher material, direct labor and overhead associated with higher sales and higher commodity, freight and energy costs in proportion to sales.
  

• Net income attributable to Magna International Inc. increased USD 757 million to USD 1,514 million for 2021 compared to USD 757 million for 2020 as a result of an increase in income from operations before income taxes of USD 942 million, partially offset by an increase of USD 119 million in income attributable to non-controlling interests and an increase in income taxes of USD 66 million.
  

Valuation Methodology (Illustrative): EV to Sales Based

*1USD=1.26CAD

Analysis by Kalkine Group 

Stock recommendation

Despite significant challenges in 2021, including the ongoing pandemic, supply-chain disruptions and semiconductor chip shortages, etc the company posted 11% growth in its consolidated sales and also lifted its margins and bottom line, which is applaudable. Despite the current industry challenges, the company anticipate a more favorable production environment extending into 2024. About 90% of its 2024 sales are already booked, a big plus for the company.

Furthermore, it is aiming to elevate its free cash flows in next couple of years, which is a key positive. From FY 2022 – FY 2024, the group expects to clock the free cash flow in a range of USD 5.75 – 6.25 billion. Hence considering the aforesaid facts, we recommend a “Buy” rating at the last closing price of CAD 80.99 as on April 20, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 20, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

Disclaimer

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