Why did shares of Martinrea (TSX:MRE) pop 6% last week? Because Mr. Market wanted to reward the company for delivering a blowout quarter with record numbers, a growing order book, and a great outlook for the full year and beyond. The auto-parts maker is clearly riding the wave of the auto industry’s rebound, and it looks like investors are in for a really good treat as the company reaches new heights.
When Martinrea stumped Magna
Industry leader Magna (TSX:MG,NYSE:MGA) also reported a record quarter last week, but the market didn’t seem too impressed – Magna shares just managed to end the week in green. So what gives?
It was the best-ever third quarter in Martinrea’s history, as revenue climbed 10% and net income (adjusted for one-time items) soared a whopping 52% year over year. Comparatively, while Magna’s third-quarter revenue rose 13% year over year, restructuring costs resulted in the company ending the quarter with 18% lower profits. Martinrea easily beat Magna on this one.
Even more notably, rising sales and good cost control pushed Martinrea’s Q3 gross margin to 10.9% from 8.4% a year ago. That’s a great sign of management efficiency. Magna’s last-quarter gross margin improved as well to 12.8%, but it was just one percentage point gain over last year.
Undeterred by slowdown
The story gets even more interesting if you look at Martinrea’s geographic mix of the growth in revenue. Judging by the way auto sales in the U.S. have surged in recent months, you would expect North America to be the fastest-growing region for Martinrea. But here’s the surprise: At 5.5%, North America clocked the lowest growth in sales in Martinrea’s last quarter.
Wait, there’s more – Martinrea’s sales from Europe shot up 28% year over year, thanks largely to robust demand for aluminum rear sub-frames from Jaguar LandRover. While Martinrea has been a supplier to the luxury brand for quite some time, it started supplying the aluminum parts only since late last year. With Jaguar betting big on light-weight all- aluminum vehicles, I think this could turn out to be a huge opportunity for Martinrea going forward.
Here lies the real potential
Martinrea is doing equally well in the other side of the world — It reported a solid 35% jump in sales from Brazil and China, which together constitute the company’s “rest of world” segment. The growth in these markets is significant for several reasons.
One, the third quarter marked Martinrea’s foray into China as the company launched its first product in the nation for Ford’s CD4 midsize platform. With that, Martinrea has stepped into the largest and fastest-growing auto market in the world – that’s massive potential ahead. Two, Brazil currently holds the rank as the fourth-largest auto market in the world, and has become the hot-spot for investments by luxury auto makers. Jaguar too is contemplating a plant in Brazil. Naturally, the more the auto makers invest in the market, the bigger the growth opportunities for Martinrea. Three, and more importantly for investors, Magna’s sales from rest of world segment grew only 10% in its last quarter. So Martinrea takes the cake yet again.
After a record 2012, Martinrea looks poised to add another milestone to its history this year. More importantly, Martinrea expects to build “significant” backlog value (indicating future revenue potential) over the next three years through its pipeline of new launches for top auto makers like Ford, General Motors, Daimler, and Chrysler, to name a few. That should enable Martinrea to build a solid foundation for the future.
Martinrea also paid its first-ever quarterly dividend in July this year. Given its solid customer base, expanding top line and margins, and widening global reach, investors can expect much more from the company in the years to come.