Auto parts and equipment industry stocks have fallen a lot lately. They could be poised for handsome capital gains.
In this article, we will investigating large-cap Magna International Inc. (TSX: MG)(NYSE: MGA), which has a market cap just under $18 billion, its mid-cap peer, Linamar Corporation (TSX: LNR), which has a market cap just under $3.3 billion, and small-cap peer, Exco Technologies Limited (TSX: XTC), which has a market cap just under $530 million.
Magna has fallen over 40% from its 52-week high. Likewise, Linamar has fallen over 43%, and Exco Technologies has fallen 33%. They’re all very close to their 52-week lows, which suggests that there may be more upside than downside at these levels.
Cheap valuations
At $44, Magna is only priced at 7.1 times its earnings. This is a cheap valuation for a company that’s expected to grow its earnings by 16% this year. Since 2010 it has normally traded at 10.3 times its earnings, which implies the shares are fairly valued at $63. So, there’s a 30% discount on the shares.
At $50.20, Linamar is only priced at 7.5 times its earnings. This is a cheap valuation for a company that’s expected to grow its earnings by 15% this year. Additionally, since 2010 it has normally traded at 12.4 times its earnings, which implies the shares are fairly valued at $93. So, there’s a 46% discount on the shares.
At $12.20, Exco Technologies is priced at 11.5 times its earnings. The company is expected to grow its earnings by 29% in this fiscal year that ends in September. Since 2010 it has normally traded at 10.9 times its earnings, which implies the shares are fairly valued at $13.5. So, there’s a 10% discount on the shares.
Dividend safety
Magna yields almost 2.7% and has been increasing its dividend for six consecutive years. In the last three years it has hiked its dividend at an average rate of 17%.
Currently, Magna pays out a quarterly dividend of US$0.22 per share, equating to an annual payout of US$0.88 per share. However, with a low payout ratio of 17%, it should be announcing a dividend increase this month, according to its usual dividend-increase schedule.
Linamar yields 0.8% with an annual payout of $0.40 per share. Linamar hasn’t shown any commitment to dividend increases, but its payout ratio of 5% makes its current dividend very safe.
Exco yields 2.3%. In fact, it just increased its dividend this month by 17%. Over six years Exco has increased its dividend by a total of 250%, equating to an average annual increase of 26%. The dividend hike brings its annual payout to $0.28 per share with a payout ratio of about 23%.
Conclusion: Are they a buy after falling 30-40%?
I believe the best time to invest in cyclical businesses is when they’re priced at significant discounts. After falling over 40% in price, Magna and Linamar look particularly attractive with cheap single-digit valuations and high earnings-growth forecasts.
Interested investors should expect most of their returns to come from capital gains because of these businesses’ growth potential. If you’re looking for consistent dividend growth from this beaten-down industry, consider Magna and Exco, which have increased their dividends for six years.
