Magna Shares Are In Overdrive

Magna blew the doors off consensus expectations with its fourth quarter results. What’s in store for shareholders of this auto part giant?

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Magna (TSX:MG,NYSE:MGA) shares rocketed out of the gate on Friday morning, touching a 52-week high of $58 before settling back to a level below $57 with about an hour and a half left in this week’s trading.

The company’s stronger than expected financial results were behind Friday’s move.  Pick an expected quarterly number and it seems like Magna beat it.  Adjusted earnings of $1.22 were ahead of the $1.14 consensus.  Sales were $8 billion vs. $7.7 billion expected, margins of 4.8% vs. 4.7% expected and the dividend increased 16% vs. 10% expected.  Nicely done!

Magna is benefitting from the revival of the North American auto industry.  Coinciding with the company’s results were indications of strong gains in U.S. light vehicle sales for February.  GM, Ford, Chrysler and Toyota announced sales gains of 7.2%, 9.3%, 4.1% and 4.3% respectively.  Reasons for the improved sales were a combination of low interest rates and a return of available credit as financial companies loosen their purse strings.


There is really no better word to describe Magna at this time.  With net cash on the balance sheet of about $1.1 billion or $4.72 per share, the company is incredibly well positioned to expand its global footprint.  In addition, about $1 billion of free cash flow was printed during 2012 indicating this war chest will continue to grow.

Magna’s success has not been lost on the market as shares are up more than 50% from the beginning of 2012.  However, valuation metrics indicate there might still be some gas left in the tank.  The company trades at a price/sales multiple of 0.44 which is bang on its long-term (15 year) average.  However, this multiple has peaked out in the 0.50 to 0.60 range in the past.  Were Magna to trade up to 0.60 times sales, the shares could reach $77 – 35% higher.

The Foolish Bottom Line

Magna’s had a great run and is well positioned to continue its global expansion.  However, the company still operates in a cyclical industry and now that the stock has reached a long-term average valuation level, it’s prudent to begin to get cautious about expectations for future gains.  This is not a name to sit on and be greedy with because of the cyclical nature of its business.  Having a game plan is an important component of being a Magna shareholder.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler owns shares of Magna.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

TSX Today
Energy Stocks

TSX Today: What to Watch for in Stocks on Thursday, August 11

Rising commodity prices could take energy and mining shares on the TSX higher at the open today.

Read more »

Supermarket aisle with empty green shopping cart

$183 for Toilet Paper and Cups: Why We Love Costco Stock

"I literally went up there to get two things."

Read more »

A worker gives a business presentation.

TFSA Investors: 2 Top Stocks to Buy Before They Rally Any Further

Although plenty of top Canadian stocks have been rallying recently, these two still offer great value and are perfect for…

Read more »

growing plant shoots on stacked coins
Stocks for Beginners

3 TSX Stocks With High Dividend Yields

Are you looking for a great opportunity to bolster your portfolio? Here are three TSX stocks with high dividend yields.

Read more »

financial freedom sign
Stocks for Beginners

1st-Time Investors: 2 Cheap Canadian ETFs to Buy for Financial Freedom 

Investing for the first time but don’t know where to start? Here are two cheap Canadian ETFs that can grow…

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

Got $4,000? 4 Simple TSX Stocks to Buy Right Now

The macroeconomic environment is tense but investing can be simple. Here are four stocks to buy now and book your…

Read more »

Oil pumps against sunset
Energy Stocks

2 Top Canadian Energy Stocks to Buy Offering Dividend Yields Above 6%

These two top Canadian energy stocks are excellent long-term investments and offer unbelievable dividend yields if you buy them today.

Read more »

Target. Stand out from the crowd

4 TSX Stocks I Own and Will Buy More of if They Fall

These are my four top choices of TSX stocks that may dip in the future, but will pay me back…

Read more »