Why Martinrea International Inc. Soared 11.11% on Wednesday

Martinrea International Inc. (TSX:MRE) watched its stock soar 11.11% on Wednesday following its Q3 earnings release. What should you do now?

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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.

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 Joseph Solitro has no position in any stocks mentioned.

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