Magna – So Hot Right Now

Like as in surface of the sun hot…

| More on:
The Motley Fool

Few companies in the Canadian market can match the roll that Magna (TSX:MG,NYSE:MGA) is on.  Not only is the auto-part behemoth’s stock on a tremendous tear, up 61% year-to-date, Magna just released second quarter results that absolutely tore the cover off the ball.  That’s a good thing for those of you not up on your baseball parlance.

Lot’s to like

You name the metric and Magna knocked it out of the park.  Second quarter revenue of $8.96 billion handily beat consensus of $8.56 billion and adjusted EPS of $1.78 made mincemeat of the estimated $1.64.

And even though the company bought back $337 million of stock and spent more than $200 million on capital expenditures during the quarter, net cash increased to $915 million from $864 million at the end of the last quarter.  The balance sheet is strong on this one.

But what has Magna followers really hopped up is that the company’s European division, aka the black sheep, posted its 6th consecutive quarterly profit.  The EBIT of $120 million is relatively small potatoes and the margin of 3.2% pales in comparison to the North American operating margin of 9.2%, however, the fact that this division isn’t bleeding is helping to spur the stock higher today.

Well, there is one negative

The negative about all of this (for me at least) is that I sold my Magna shares about $10 ago.  This decision was justified by a valuation that was beginning to appear stretched in my mind.  It’s too early to tell if this might look like a better decision in 2-3 years, but as it stands, clearly I left some money on the table.

Just to check in on valuation however, the company’s historic price/sales ratio is provided below.

magna price sales


Source:  Capital IQ

Over this period, Magna’s average P/S multiple has been 0.37 and it has maxed out at 0.62.  With today’s move, the stock is now trading very close to this historical high indicating that if Magna’s valuation wasn’t stretched when I sold, it certainly is now.

The company is now guiding for 2013 revenues of $33.3 to $34.7 billion.  If we call it $34 billion, this still results in forward P/S ratio of 0.56, which is obviously at the high end.

Foolish takeaway

The auto industry is in a groove right now and Magna is benefitting big time.  This is still a cyclical industry however and though the music is currently blaring, this won’t always be so.  Be mindful of how quickly the cycle can turn and remain vigilant in monitoring your Magna shares as today’s glory could become tomorrow’s blunder.

Magna is a great Canadian success story born out of humble beginnings.  To learn of 3 more companies that started small and now dominate their respective industries, click here and we’ll send you our special FREE report “3 U.S. Stocks Every Canadian Should Own” – FREE!

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

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

Fool contributor Iain Butler (sadly) does not own shares in any companies mentioned at this time.  The Motley Fool does not own shares in any companies mentioned at this time. 

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

funds, money, nest egg
Investing

Retirees: 3 Canadian Stocks You Can Confidently Own for the Next 20 Years

Here's why retirees need to plan beyond 20 years in retirement. Fortis Inc. (TSX:FTS), Royal Bank of Canada (TSX:RY) stock…

Read more »

Question marks in a pile
Tech Stocks

Should You Invest in Absolute Software Stock Right Now?

Absolute Software (TSX:ABST) is a tech stock that is worth your attention, as it offers exposure to exciting security markets.

Read more »

Dividend Stocks

1 Oversold Dividend Stock I’d Buy in December 2022

Here’s one of the best Canadian dividend stocks to buy in December that I find undervalued.

Read more »

Investing

FOR TUESDAY – 3 TSX Stocks to Buy Today and Hold for the Next 3 Years

Given their growth prospects, these three TSX stocks could outperform over the next three years.

Read more »

Supermarket aisle with empty green shopping cart
Stocks for Beginners

Is Dollarama Stock a Buy at All-Time Highs?

Dollarama stock (TSX:DOL) remains at all-time highs while the rest of the market drops. Does this mean it's due to…

Read more »

Online shopping
Tech Stocks

Should You Buy Shopify Stock If the Rate Hike Cycle Slows?

Is SHOP stock a buy after its 72% drop this year?

Read more »

A bull outlined against a field
Investing

2 Canadian Stocks Set to Soar in a New Bull Market

Consider Sleep Country Canada Holdings (TSX:ZZZ) stock and another mid-cap bargain, as the bear market moves on.

Read more »

Gold bars
Metals and Mining Stocks

Better Buy: Newmont or Barrick Gold Stock?

If you think better days are ahead for gold miners, consider exploring gold stocks Newmont and Barrick Gold.

Read more »