Why is Magna Stock So Cheap?

Interested in more cheap stocks? Check out our recent episode on Taiwan Semiconductor Andrew Willis: We at Morningstar don’t always agree with the market on the price of a stock. We might wonder: Why is it so Cheap? But in the case of Magna (MG), it’s complicated… On the one hand, we have one of the world's largest, most diversified auto parts suppliers. A source of Canadian pride that could just about build an entire car with the variety of parts they produce. That means they’d be a great partner for the likes of electric start-ups. On the other hand, Magna does so much that it could be spreading itself too thin, senior equity analyst Richard Hilgert says, with profit margins last year around only 4.5%. We do currently see a little upside potential left for Magna, however. And there is that one question about what’s happening on the demand side: If automakers are consolidating their suppliers, won’t they prefer a partner with the widest product line? For Morningstar, I’m Andrew Willis. Bulls Say High switching costs and significant barriers to entry enable sticky market shares. Incremental revenue from contracted new business provides revenue growth slightly above global industry production volume and should bolster operating leverage in the near term. As automakers consolidate purchases with fewer suppliers, large vendors such as Magna are in the best position to gain share because they can offer a wide range of parts, modules, and complete systems. Bears Say Magna relies heavily on a handful of automakers with its top five customers accounting for 69% of total 2022 revenue. The cyclical, capital-intensive nature of the industry means that a modest volume decline could translate into a significant drop in profitability. The auto-parts supply industry is highly competitive and customers expect annual, contractual price reductions. Raw material costs are volatile, adding even more uncertainty to margin.