Linamar Corporation (TSX:LNR), Canada’s second-largest manufacturer of automotive parts, released its third-quarter earnings results after the market closed on Tuesday, and its stock responded by plummeting 13.88% in Wednesday’s trading session. The stock now sits more than 17% below its 52-week high of $80.58 reached earlier this month, so let’s break down the quarterly results and the fundamentals of the stock to determine if we should use this weakness as a long-term buying opportunity.
The results that ignited the sell-off
Here’s a quick breakdown of 12 of the most notable financial statistics from Linamar’s three-month period ended September 30, 2017, compared with the same period in 2016:
| Metric | Q3 2017 | Q3 2016 | Change |
| Powertrain/Driveline sales | $1,289.4 million | $1,227.4 million | 5.1% |
| Industrial sales | $260.3 million | $228.1 million | 14.1% |
| Total sales | $1,549.7 million | 1,455.5 million | 6.5% |
| Gross profit | $230.8 million | $234.4 million | (1.5%) |
| Gross margin | 14.9% | 16.1% | (120 basis points) |
| Operating earnings | $141.9 million | $163.9 million | (13.4%) |
| Net earnings | $107.3 million | $122.2 million | (12.2%) |
| Net earnings per share (EPS) – diluted | $1.62 | $1.86 | (12.9%) |
| Cash generated from operating activities | $194.2 million | $280.6 million | (30.8%) |
| Vehicle production units: North America | 4.18 million | 4.53 million | (7.7%) |
| Vehicle production units: Europe | 5.00 million | 4.74 million | 5.5% |
| Vehicle production units: Asia Pacific | 11.9 million | 11.5 million | 3.5% |
Should you buy Linamar today?
It was a disappointing quarter overall for Linamar as production volumes fell 7.7% in North America and its earnings declined by double digits, so I think the sell-off on Wednesday was warranted.
That being said, I think the sell-off represents a very attractive entry point for long-term investors for one fundamental reason in particular — valuation; Linamar’s stock now trades at just 7.9 times fiscal 2017’s estimated EPS of $8.35 and a mere 7.4 times fiscal 2018’s estimated EPS of $8.90, both of which are very inexpensive compared with its five-year average multiple of 11.
It’s also worth nothing that Linamar pays a quarterly dividend of $0.12 per share, equal to $0.48 per share annually, which gives it a yield of about 0.7%, and its 20% dividend hike in March has it on track for 2017 to mark the first year in which it has raised its annual dividend payment since 2014.
Linamar’s stock is up more than 29% since I recommended it in July 2016 and more than 14% year to date, and I think the sell-off on Wednesday represents an attractive entry point for long-term investors, so take a closer look and consider adding it to your portfolio today.
