Can Linamar Corporation Double From Here?

Linamar Corporation (TSX:LNR) has declined 47% in the past year. What comes down must go up, right? Can it double from here?

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The Motley Fool

Linamar Corporation (TSX:LNR) is less well known than Magna International Inc. (TSX:MG)(NYSE:MGA) because it’s smaller. By market cap, Magna is about six times bigger than Linamar. Magna also takes away the spotlight as a dividend grower that pays a decent yield of close to 3% today.

That said, Linamar could reward you more substantially in total returns.

If you’d bought $10,000 of Linamar in April 2012 at about $19.50 per share, you would have enjoyed a total return of 138%, equating to an annualized rate of return of 23%. The $10,000 would have grown to $23,855, which more than doubled in a little over four years.

For comparison, in the same period, the same investment in Magna would have result in a total return of 122%, equating to an annualized rate of return of 21%.

Although Linamar’s multiple contracted from a price-to-earnings ratio of 10.6 to 6.1 in that period, its earnings-per-share growth between the fiscal years 2012 and 2015 was phenomenal, increasing 196% from $2.24 to $6.63.

The business

Linamar is a global auto parts manufacturer that creates highly engineered products. It consists of two operating segments: the Powertrain/Driveline segment and the Industrial segment, which are further divided into four operating groups–Machining and Assembly, Light Metal Casting, Forging, and Skyjack.

Linamar has 57 manufacturing locations, six research and development centres, and 21 sales offices in 17 countries in North and South America, Europe, and Asia.

Double-digit growth in the first quarter

In the first quarter, Linamar’s sales, operating earnings, net earnings, and EPS all reached record levels. Its sales were $1.5 billion, 18.8% higher than the first quarter of 2015. Its operating earnings were $172.1 million, which were 10.5% higher. Its net earnings were up 11.2% to $126.4 million, and its EPS were up 10.9% to $1.94.

Linamar CEO Linda Hasenfratz summarized the first quarter in a positive tone: “We are off to a solid start in 2016 with another quarter of record financial results and double-digit growth. Markets are in good shape enhancing the key driver of our performance; market share growth. Content per vehicle hit new highs in every region and Skyjack continues to build market share in key products, both are doing a fantastic job of driving our great growth today and will continue to do so in the future.”

Conclusion

The million dollar question is, Can Linamar continue growing at a high rate?

From the first-quarter results, it seems Linamar may continue to grow at a double-digit rate, but a growth rate in the teens is dimmed by the monstrous 35-49% annualized EPS growth it experienced between 2012 and 2014.

Since Linamar is a cyclical company, it’ll probably be years before the cycle turns, at which time Linamar could experience growth of +20%; it could double.

So, investors buying today need to exercise their utmost patience. Otherwise, they should wait until Linamar shows signs of monstrous growth again.

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 Kay Ng owns shares of LINAMAR CORP. Magna International is a recommendation of Stock Advisor Canada.

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