Over the last month, the entire market seems to have been holding its breath, waiting for some kind of catalyst to pin the market’s next wave of momentum on. Are indications that the weakening global economy is rippling into the health of the U.S. economy correct, or is an increasingly accommodative Federal Reserve going to give the market one more reason to stabilize as it has so many times over the last decade? Will the market’s expectations of a trade deal between the U.S. and China finally be realized, or is the latest round of rumor and high-level talks just one more chapter in a conflict that is now a year in the making, with no end in sight? To throw even more kindling on the fire, will the Trump’s recent move to push the courts to overturn Obamacare wreak the kind of havoc that so many experts and even healthcare are predicting right now?
All of these questions have combined to give investors reasons to push the market off of short-term highs reached in the last couple of weeks. That has pushed most of the stocks in the market off of similar highs and into interesting pullback patterns. Among those, perhaps one of the most sensitive industries right now to pressures, both from economic strength worries as well as to trade worries is the auto industry. That includes stocks that provide goods and services to the auto industry.
Magna International Inc. (MGA) is an auto components producer, based in Canada, that supplies the auto industry with a pretty wide range of manufacturing and production capabilities. The stock followed the market’s move at the beginning of the year off of trend lows to a rally of more than 25% by the middle of February; from that point, however, the stock has dropped back quite a bit and is currently just a little over 5% above its low in December. I attribute a big chunk of that drop to broader concerns about trade as well as the broader economy in general; however that drop has also push the stock to levels that represent a pretty attractive value opportunity. With a solid fundamental base to operate from as well, this is a stock that looks like it could be a stock to keep track of – especially if the U.S. and China can finally figure out an acceptable compromise and strike an actual trade deal. Let’s take a look.
Fundamental and Value Profile
Magna International Inc. (Magna) is a global automotive supplier. The Company’s segments are North America, Europe, Asia, Rest of World, and Corporate and Other. The Company’s product capabilities include producing body, chassis, exterior, seating, powertrain, electronic, active driver assistance, vision, closure, and roof systems and modules, as well as vehicle engineering and contract manufacturing. The Company has over 320 manufacturing operations and approximately 100 product development, engineering and sales centers in over 30 countries. It provides a range of body, chassis and engineering solutions to its original equipment manufacturer (OEM) customers. It has capabilities in powertrain design, development, testing and manufacturing. It offers bumper fascia systems, exterior trim and modular systems. It offers exterior and interior mirror systems. It offers sealing, trim, engineered glass and module systems. It offers softtops, retractable hardtops, modular tops and hardtops. MGA has a current market cap of about $15.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased only modestly, at not quite 4%, while Revenues dropped slightly at -2.44%. In the last quarter, earnings improved by about 4.5%, while sales increased about almost 5.5%. This is also part of a pattern of slowing growth that I attribute to the impact from tariffs on costs, both for MGA as well as for its customers.
Free Cash Flow: MGA’s free cash flow is healthy and growing, at a little more than $2.29 billion. This number has been somewhat cyclic from one quarter to the next, but has shown a general, upward stair-step pattern of growth going back to the last quarter of 2016. It also translates to an attractive Free Cash Flow Yield of 14.6%.
Dividend: MGA pays an annual dividend of $1.46 per share, which translates to an annual yield of 3.03% at the stock’s current price. The company has also increased the dividend from $1.32 per share, per year since late last year, which is a strong indication of management’s confidence in their business.
Return on Equity/Return on Assets: These numbers are very strong. ROE is 20 and ROA is 8.79.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MGA is $34.09 and translates to a Price/Book ratio of 1.41 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.84, suggesting the stock is nicely undervalued by about 30%; at par with its average, the stock should be trading at about $63 per share. As a long-term target, that price looks even better when you consider that based on the stock’s Price/Cash Flow ratio, MGA is just a little under 50% below its historical average. That would put the stock in range to test its all-time highs and in position to start making new ones.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: After following a nice upward trend until May, the stock peaked at around $67.50 before dropping back its current level. The stock looked to be building some strong bullish momentum early in March as it pushed above early February pivot high levels, but since that point has declined more than $6 per share. Its immediate resistance is around $50 based on previous pivots in that range. If the stock fails to break above that level soon, and instead drops below its immediate support around $47, I expect the stock should retest trend low support around $43.
Near-term Keys: If you’re looking for a short-term bullish trading setup, you can take a break above $50 as an aggressive, low-probability signal with an eye on the 38.2% line, which I expect should act as resistance a little above $52 per share. A push below $47 would be a high-probability signal to short the stock or consider buying put options with a target around $43. If you’re not afraid of the likelihood the stock should continue to see some volatility as long as speculation and worry around trade and the economy persists, the fact of the matter is that MGA has an excellent value proposition right now, with solid fundamentals behind it.