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Why Martinrea International Inc. Soared 11.11% on Wednesday

Martinrea International Inc. (TSX:MRE), one of the world’s largest diversified automotive suppliers, announced record third-quarter earnings results after the market closed on Tuesday, and its stock responded by soaring 11.11% in Wednesday’s trading session. Let’s break down the quarterly results and the fundamentals of its stock to determine if we should be long-term buyers today.

The results that ignited the rally

Here’s a quick breakdown of eight of the most notable financial statistics from Martinrea’s three-month period ended September 30, 2017, compared with the same period in 2016:

Metric Q3 2017 Q3 2016 Change
Sales $838.54 million $914.73 million (8.3%)
Gross margin $113.42 million $99.70 million 13.8%
Adjusted EBITDA $92.41 million $80.61 million 14.6%
Adjusted EBITDA margin 11.0% 8.8% 220 basis points
Adjusted operating income $51.87 million $43.39 million 19.5%
Adjusted operating margin 6.2% 4.7% 150 basis points
Adjusted net income $36.26 million $29.10 million 24.6%
Adjusted net earnings per share (EPS) $0.42 $0.34 23.5%

Notable commentary from the report

In the press release, Martinrea’s CFO Fred Di Tosto stated the following regarding its decline in sales:

“Sales for the third quarter, excluding tooling sales of approximately $39 million, were $800 million, slightly lower than previously announced sales guidance as a result of losing two weeks of sales on the GM Equinox program due to the strike at CAMI, which ended in mid-October.”

Martinrea’s executive chairman Rob Wildeboer stated the following regarding its outlook:

“The future looks great, and we are now anticipating that our margin improvement over the next three years will accelerate from the past three years … Next year we expect to see double digit growth in adjusted net earnings, and another record year … As for sales, we anticipate they will be flattish next year, given anticipated timing of new launches and a full year impact of the module assembly sales in our Ingersoll plant moving to a Value Added model, but believe sales will start to increase in 2019 and grow to over $4 billion in 2020, based on our budgets.”

Was the rally warranted?

It was an outstanding quarter overall for Martinrea, and it marked its 12th consecutive quarter with record year-over-year adjusted earnings. On top of the strong earnings results, the company’s outlook on the future is very bright, so I think the market responded correctly by sending its stock soaring in Wednesday’s trading session.

What should you do now?  

Even after the +11% pop, I think Martinrea’s stock represents an attractive investment opportunity for the long term for one fundamental reason in particular: valuation. Martinrea’s stock still trades at just 7.5 times fiscal 2017’s estimated EPS of $1.86 and a mere 6.8 times fiscal 2018’s estimated EPS of $2.04, both of which are incredibly inexpensive given its current double-digit percentage earnings-growth rate.

Martinrea’s stock is up more than 60% since I recommended it in February 2016 and more than 40% since it reported its second-quarter earnings results in August, and I think it still represents a very attractive long-term investment opportunity, so take a closer look and consider beginning to scale in to a position today.

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Fool contributor Joseph Solitro has no position in any stocks mentioned.

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