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.
