Why is Magna Stock so Cheap?

This Canadian auto parts giant just had a big revenue boost – here’s how long it could last.

Andrew Willis 11 December, 2023 | 4:43AM
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Key Takeaways for Magna Stock:

  • Magna’s product breadth is appreciated by automakers, but the company has long suffered from mid-single-digit margins.
  • Revenue grew organically by 10% year over year as of last quarter, but to maintain this market share and improve margins on the top line, the company needs to increase process and product innovation.
  • We applaud Magna’s commitment to 7% of pretax profit towards R&D but note this represents 1% of total revenue. Most successful automotive suppliers invest 2-4% of revenue, and some up to 6%.

 

Andrew Willis: Earlier this year, we wondered whether Magna MG with its wide line of auto parts is perhaps stretched a little too thin.   

Fast forward to last quarter and with organic revenue up 10%, and 3% above top-line consensus, the concerns of investors may have been quelled – for now. Given the company’s breadth of products, however, senior equity analyst Richard Hilgert cautions that the pace and scope of technological innovation needs to be faster and broader to achieve a durable competitive advantage.

More Research Could See Top- and Bottom-line Boost for Magna Stock

We note that Magna’s average economic profit since 2002 is a mere 2.4%, but we believe R&D rather than cost-cutting is the path to prosperity for auto parts suppliers. And instead of ‘red-lining’ the company to produce more for less, we may see more on the top line.   

For Morningstar, I’m Andrew Willis.

bulls Magna 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 Magna 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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Magna International Inc58.16 CAD0.52Rating

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.

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