Why Magna International Inc. Has Huge Potential

When word of an impending renegotiation of NAFTA started to take shape, some investors started to look at the automotive sector with interest. Thousands of jobs on both sides of the border are reliant on the current agreement, which sees billions worth of goods traverse the border in both directions with increasing frequency.

One such company that has a vested interest in that sector is Magna International Inc. (TSX:MG)(NYSE:MGA). Magna is one of the largest automotive suppliers in the world with over 420 manufacturing and engineering facilities scattered across 29 countries on four continents. Few companies in the automotive sector have this level of reach and influence.

How is Magna doing?

In the most recent quarter, Magna saw sales across the company increase by 5% over the same period last year, coming in at US$9.372 billion. Magna’s globally diversified operation ensures that a slowdown in one segment can be offset to some extent by growth in another.

Gross margins in the first quarter realized a slight increase to 15.5%, or US$170 million, primarily attributed to higher net productivity and efficiency improvements that were implemented across the company’s manufacturing facilities.

Net income for the quarter came in at US$586 million, representing a US$94 million increase over the same quarter last year. In terms of earnings per share, Magna finished the first quarter with US$1.53 per share diluted, bettering the US$1.22 per share diluted from the same quarter last year.

Magna is set to report activities for the second quarter in a few weeks. Analysts are forecasting earnings to be in the range of US$1.38-1.55 per share.

Overall, the company will continue to perform well, despite the potential for either a border tax or significant NAFTA shake-up on the horizon — both of which seem unlikely.

While we cannot determine if or when a border tax will get imposed on goods crossing the border into the U.S., we can tell for certain that in the time since NAFTA was implemented, a flurry of economic activity in the sector has been realized, and there are millions of jobs reliant on that sector.

Even in the unlikely event that a border tax is imposed on goods entering the U.S., Magna could easily shift manufacturing to a facility in the U.S.

Is Magna a good investment?

Magna operates in a growing segment of the economy with significant advantages over its peers. The company has set up operations in dozens of countries, conveniently (if not strategically) located near every major automotive manufacturer in the world.

From a revenue standpoint, the company is set to continue growing over the next year. From a political standpoint, the prospects of tearing up NAFTA when millions of jobs and billions of dollars of goods are fully reliant on the agreement seems to be diminishing by the day.

Irrespective of which way NAFTA may turn, Magna continues to grow and garner new opportunities. By way of example, Magna this month announced that the new Jaguar E-Pace SUV from Jaguar Land Rover will be built at Magna’s facility in Austria. That same facility already manufacturers five different models from other automotive companies.

Another point that investors often overlook is that Magna pays a respectable quarterly dividend with a yield of 2.47%. That dividend has steadily risen over the years. Considering Magna’s steady stream of improving results, there’s no reason to doubt that future increases are coming.

In my opinion, Magna remains a great opportunity for investors, and the recent dip in price represents an excellent buying opportunity for those investors that are looking to buy into the sector.

Magna currently trades at just under $60 with a P/E of 8.67.

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Fool contributor Demetris Afxentiou has no position in any stocks mentioned. Magna Interntaional is a recommendation of Stock Advisor Canada.

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