Why Did Martinrea International Inc. Shares Soar 6.75%?

Martinrea International Inc. (TSX:MRE) reported better-than-expected results as the company focuses on higher-margin business.

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Martinrea International Inc. (TSX:MRE) reported its first-quarter results this week that were above expectations, and management highlighted the fact that the future is looking bright.

Earnings per share came in at $0.55 — a 25% improvement compared to the same quarter last year and well above consensus expectations of $0.51.

Solid margin improvement

The company made good progress in increasing margins and efficiencies, as the gross margin was 13.2% versus 11.3% in the same quarter last year. For comparison purposes, and to illustrate how effective the company has been in increasing margins, we should note that 2016’s gross margin was 10.9% — up from 10.4% in 2015 and 9.7% in 2014.

Heading further down the income statement, we can see that the company also improved its operating margin to 6.2% from 5.3% last year, and its adjusted EBITDA margin to 10.3% from 8.9% last year.

While sales declined 4.4%, the bullish thesis on Martinrea is still strong, given the operational improvements and efficiencies that are being achieved as well as the fact that the company is focused on higher-margin businesses, which will ultimately make the company a more profitable one.

And we can see this in the company’s improving margins and cash flow generation.

Looking at the cash flow statement, we see that the company generated approximately $97 million in operating cash flow (before changes in working capital) and free cash flow of $14 million (or $29 million before changes in working capital), representing a significant improvement over the same period last year.

Balance sheet strengthening

The company’s long-term debt declined by almost $40 million to $658 million, and its debt-to-equity ratio declined to 73% from 83% last year. That’s still high, but it’s manageable considering the amount of free cash flow the company is generating.

Valuation remains attractive

The stock trades at a P/E of 5.8 times this year’s expected consensus earnings, despite its 23% expected 2017 earnings-growth rate, and it trades at slightly more than its book value with an ROE of 12.7%. With free cash flow of $33 million in 2016, $34 million in the first half of 2017, and improving margins, it is still my view that this is a very cheap stock despite the run up.

Comparing this to Magna International Inc. (TSX:MG)(NYSE:MGA), we see that Magna trades at a P/E of almost 11 times this year’s earnings, and it has an 11% earnings-growth rate based on consensus expectations.

And although Magna is a well-run business with a very healthy ROE of 21.5% and less debt, the company appears to have less room for margin improvements at this point.

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 Karen Thomas has no position in any stocks mentioned. Magna International is a recommendation of Stock Advisor Canada.

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