The Motley Fool

Is Magna International Inc. the Best Way to Invest in the Auto Industry Today?

Magna International Inc. (TSX:MG)(NYSE:MGA), one of the world’s leading manufacturers and distributors of automotive products, announced better-than-expected second-quarter earnings results before the market opened on August 7, and its stock has responded by making a very small move to the upside. Let’s take a closer look at the results and its forward valuations to determine if we should consider establishing long-term positions, or if we should wait for a better entry point in the trading sessions ahead.

The better-than-expected quarterly results

Here’s a summary of Magna’s second-quarter earnings results compared with what analysts had expected and its results in the same period a year ago. All figures are in U.S. dollars.

Metric Reported Expected Year-Ago
Diluted Earnings Per Share $1.26 $1.19 $1.18
Revenue $8.13 billion $8.05 billion $8.91 billion

Source: Financial Times

Magna’s diluted earnings per share from continuing operations increased 6.8% and its revenue decreased 8.7% compared with the second quarter of fiscal 2014. The company’s very strong earnings-per-share growth can be attributed to its net income from continuing operations increasing 3.7% to $538 million and its weighted average number of common shares outstanding decreasing 5.4% to 415.4 million.

Its steep decline in revenue can be attributed entirely to the weakening of certain currencies against its reporting currency, the U.S. dollar, which reduced its revenue by $890 million. Excluding the negative impact of foreign currency translation, its revenue increased 1.3% year over year.

Here’s a quick breakdown of eight other notable statistics from the report compared with the year-ago period:

  1. Vehicle production volumes increased 3% to 4.546 million units in North America
  2. Vehicle production volumes increased 0.4% to 5.347 million units in Europe
  3. Complete vehicle assembly volumes decreased 17.4% to 28,343
  4. Gross profit decreased 8.9% to $1.17 billion
  5. Gross margin as a percentage of sales remained unchanged at 14.4%
  6. Adjusted earnings before interest and taxes decreased 6.2% to $677 million
  7. Cash provided by operating activities decreased 27.9% to $440 million
  8. Ended the quarter with $1.16 billion in cash and cash equivalents, an increase of 5.8% from the beginning of the quarter

Magna also announced a slight increase to its full-year revenue outlook, and is now calling for $30.9-32.6 billion compared with its previous outlook of $30.8-32.5 billion, but this is still down significantly from its original outlook of $33.1-34.8 billion that it gave at the conclusion of the fourth quarter of fiscal 2014.

Should you buy or avoid Magna’s stock today?

The second quarter was far from impressive for Magna, but it did surpass analysts’ expectations, so I think the relatively flat performance in its stock was warranted.

However, I do think the stock represents an attractive investment opportunity for the long term, because it trades at inexpensive forward valuations, including just 15.4 times fiscal 2015’s estimated earnings per share of $4.65 and only 12.8 times fiscal 2016’s estimated earnings per share of $5.58, both of which are very inexpensive compared with the industry average multiple of 29.5.

In addition, Magna pays a quarterly dividend of $0.22 per share, or $0.88 per share annually, which gives its stock a yield of approximately 1.6% at today’s levels. A 1.6% yield may not seem impressive at first glance, but it is very important to note that the company has increased its annual dividend payment for five consecutive years, and its consistent free cash flow generation could allow this streak to continue for another five years at least.

With all of the information provided above in mind, I think Magna International represents one of the best long-term investment opportunities in the automotive industry today. Foolish investors should take a closer look and consider beginning to slowly scale in to positions over the next couple of weeks.

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Fool contributor Joseph Solitro has no position in any stocks mentioned. Magna International is a recommendation of Stock Advisor Canada.

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