Why is Magna Stock So Cheap?

This Canadian auto part giant is at a critical crossroads. 

Andrew Willis 5 May, 2023 | 4:46AM
Facebook Twitter LinkedIn

 

 

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 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 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.

Get the Latest Stock Insights in Your Inbox

Subscribe Here

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Magna International Inc67.56 CAD1.67Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy       Disclosures        Accessibility