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Investors, Beware: The Trade War Has Dented This Sector Leader’s Earnings

The auto parts industry has been a vocal opponent of Trump’s steel and aluminum tariffs. This industry has significant cross-border trading and relies on complicated free-trade supply chains. Although the impact has been unclear, second-quarter earnings will provide investors a first glimpse at the potential impacts.
 
The metal tariffs took effect near the end of May, and the second quarter ended in June 2018. As such, earnings will contain a full month of operations under the new tariffs. One of the companies under the microscope is Magna International (TSX:MG)(NYSE:MGA); one of the world’s largest auto parts manufacturers reported second-quarter earnings this morning.
 
The results? They’re not good.
 
Missed estimates
 
Magna reported earnings of $1.67 per share and revenues of $10.28 billion. Unfortunately, the company missed EPS estimates by $0.07 and revenue by $200 million. The company highlighted three areas that negatively impacted results: a higher U.S. dollar, reduced income from its joint venture transmission business, and tariffs.
 
The worst part? Magna revised 2018 and 2020 guidance downwards. It’s never a good thing when guidance takes a hit. At the mid-range of guidance, full-year 2018 sales are expected to come in $600 million lighter than previously expected. Likewise, adjusted net income is expected to be $100 million below expectations. Based on current shares outstanding, that is a hit of $0.28 per share.
 
Before earnings, analysts expected the company to post full-year EPS of $7.02 in 2018. Given the revised outlook, expect analysts to revise this estimate downwards. A $0.28 hit is 4% below current average estimates.
 
Outside of tariffs, the biggest disappointment is the poor performance of its joint ventures in China and Europe. The company slashed its equity income expectations by 16.5% to $355 million. Once again, expect analysts to reduce long-term estimates based on this new information.
 
Valuation
 
So, where do investors go from here? Since reaching a high of $86.69 in mid-June, the company has lost almost 12% of its value. Including Q2 results and Tuesday’s close of $76.88, Magna is trading at 9.04 times earnings. Given the downward revisions to earnings, it is trading at a forward P/E of 8.74.
 
The company is now expected to grow earnings by approximately 12% over 2017, which gives Magna a P/E-to-growth ratio of 0.75. At these levels, the company can still be considered cheap. 
 
Wait and see
 
It wasn’t all bad news. Magna increased revenues by 12.5% and posted record adjusted EPS of $1.67, up 23% year over year. The company is still growing, although expectations will now be tempered.
 
The revised guidance is a disappointment. Although the company is not quite the bargain it once was, any further price weakness could mark a buying opportunity. Magna is still the best in its breed in the industry, yet this quarter has proved that it’s not immune to the macro environment. Although Magna remains a solid long-term hold, expect current headwinds to hold it back in the short term.

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Fool contributor Mat Litalien has no position in any of the companies listed. Magna is a recommendation of Stock Advisor Canada.

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