Why Magna International Inc. Had a Turbulent Year and Where it’s Headed

Magna International Inc.’s fortunes (TSX:MG)(NYSE:MGA) could turn around in 2016.

| More on:
The Motley Fool

In December 2014, Magna International Inc. (TSX:MG)(NYSE:MGA) was up 46% year to date, and it turns out to be one of the top-performing stocks of the year.

In December 2015, Magna is down 9% year to date and leaves investors poorer as they step into a new year.

That wasn’t the kind of scenario investors in the auto-parts manufacturer expected to play out when they rang in 2015, especially with the recovery in the U.S. automotive market. In fact, the U.S. auto market has had a tremendous year; October even turned out to be the best month in a decade for the industry.

So what went wrong with Magna, considering that it gets half its revenue from North America? Will the company’s struggles continue into next year?

Actually, there’s nothing wrong here!

It’s not that Magna didn’t benefit from strong auto sales in the U.S. Its sales from the market improved a percentage point during the nine months ended September. More importantly, North America was the only geographic region where Magna’s sales grew.

All figures in billions of U.S. dollars. Data source: Company financials. Table by author

Figures in billions of U.S. dollars. Data source: company financials. Table by author.

Blame currency headwinds for Magna’s tepid growth in 2015. As the company reports numbers in U.S. dollars, a stronger greenback means lower international revenues when converted. In the absence of currency translation headwinds, Magna’s sales from North America would’ve been 6% higher for the nine-month period.

The table above also explains why Magna’s total sales for the nine-month period dropped 8% year over year. While growth in the European market remains a challenge, slowdown in key markets such as China and Brazil has added to Magna’s woes. No wonder, then, that the company’s full-year sales projections dropped to US$31.3-32.6 billion by the third quarter from US$33.1-34.8 billion projected at the beginning of the year.

While that sounds uninspiring, the market sadly appears to have missed the bigger picture.

On the right track

Despite lower sales, Magna expects to end 2015 with a flattish operating margin of 7.7%. In fact, Magna’s net income improved 4% during the nine months despite lower revenue. While cheaper input has helped, Magna’s aggressive restructuring efforts, including divestment of non-profitable operations, have played a key role in boosting profits.

Meanwhile, Magna continues to strive hard to boost revenues with new products and expansion programs across the globe.

Will Magna bounce back in 2016?

It could have, had Volkswagen not added an element of uncertainty. The Volkswagen scandal is bound to hit Magna as the auto giant counts among its six key customers, contributing a little more than 10% to its sales. The growing uncertainty in China and Brazil’s shrinking economy are added concerns.

That said, Magna looks very attractive right now from a valuation standpoint: the stock is trading at only eight times trailing earnings, even as analysts project the company to grow at a 19% clip in 2016.

In fact, this could be a great time for investors to consider owning one of the world’s leading auto-parts suppliers with an enviable customer list that includes names like General Motors, Ford, Fiat-Chrysler, BMW, and Daimler. As external headwinds fade, Magna could emerge as a solid turnaround stock.

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.

Fool contributor Neha Chamaria has no position in any stocks mentioned. David Gardner owns shares of Ford.

More on Investing

worry concern
Dividend Stocks

Worried About a Recession? 2 Canadian Blue-Chip Stocks to Buy and Hold for Dear Life

A recession is worrisome. Buying two blue-chip TSX stocks and holding them for the long term will deliver stable, less…

Read more »

online shopping
Tech Stocks

Why You Should Buy Shopify Stock Before It Rockets Even Higher!

SHOP stock is down 70% from all-time highs. Let's see why it makes sense to buy the dip in February…

Read more »

money cash dividends
Dividend Stocks

TFSA: 3 of the Best Canadian Dividend Stocks to Buy This Year

Are you looking for some of the best Canadian Dividend stocks to buy this year? Here are three great options…

Read more »

Golden crown on a red velvet background
Energy Stocks

3 Canadian Dividend Aristocrats to Buy and Hold for Passive Income

Are you seeking safer options amid elevated market volatility? Consider these three Canadian dividend aristocrats to receive uninterrupted passive income…

Read more »

A colourful firework display
Tech Stocks

3 Venture Capital Stocks That Started 2023 With a Bang

Even if a company starts a year strong, it may not hold that momentum throughout the year. Still, these VC…

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

Suncor Energy Stock: Has it Bottomed Out?

Suncor Energy Inc (TSX:SU) stock has been falling lately. Has it bottomed out yet?

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Stocks for Beginners

2 Top Stocks to Buy in February 2023

Here are two of the best Canadian stocks you can buy in February 2023.

Read more »

Aircraft wing plane

Bombardier Stock: Should You Invest in the Current Bullish Trend?

Capturing a bullish trend from beginning to end is an exception, not the rule. In most cases, you will only…

Read more »