The Motley Fool

Linamar (TSX:LNR) CEO Bets on the Future

One of the more volatile industries in recent months as a result of the uncertainty facing the current NAFTA agreement are automotive parts manufacturers like Linamar (TSX:LNR), Magna International and several others.

It’s hard to make a bet on a company like Linamar where a significant chunk of its revenue is generated from North America when you know that the automotive parts it moves back and forth across the border might become more expensive to both make and sell as a result of the trade spat between Canada and the U.S.

At the time of writing, there is no deal between Canada and the U.S. after Mexico. The U.S. reached a bilateral trade agreement August 28. President Trump had said that he wanted a Canadian deal by August 31. However, many experts believe this isn’t realistic given that it took the Mexicans and Americans two months of heavy negotiations to reach their agreement.

I will follow up this story in the weeks ahead once the dust settles.

Big hurdles to climb

However, what we do know is that the U.S. faces a lot of its own legislative hurdles if it wants to go ahead without a trilateral deal that includes Canada.

“My hope is that Canada does not cave in to a bully with a gun against our head (the threat of 25-per-cent auto tariffs) and realizes that nothing is going to get approved in Congress without the ‘true north strong and free’ being involved,” stated David Rosenberg, chief economist at Gluskin Sheff + Associates. “This seems to be an area where the legislative branch is starting to show some backbone, at least verbally, and I do sense that the president has underestimated where most of Congress stands on this issue of Canada being excluded from any agreement.”

There’s a lot of brinksmanship still to be played on this front. Investor reticence to own Linamar’s stock — Fool contributor Brad Macintosh calls it a “market sentiment problem” — is in my opinion overblown.

As the Fool’s Victoria Hetherington recently discussed, Linamar’s become a bit of a value stock in 2018 thanks to the hit it’s taken from the steel and aluminum tariffs.

“It’s discounted by 28% compared to its future cash flow value and has some fine looking multiples: a P/E of 5.7 times earnings, PEG of 0.7 times growth, and in terms of its P/B ratio Linamar is trading at book value,” Hetherington wrote August 27.

CEO makes a huge bet

Linda Hasenfratz has run Linamar since August 2002 after taking over from her dad, Frank, who founded the company in 1966. Since taking the top job, she’s delivered an annual total return of 10%, significantly higher than the TSX.

I consider Hasenfratz to be one of the best CEOs in Canada. Her moves to diversify its revenues away from automotive parts into agricultural and construction machinery will pay dividends for the company for years to come.

The problems that it’s currently facing on the auto parts front will seem like a pesky mosquito bite in 3-5 years from now. As recently as May, Linamar stock was trading close to $80; it’s now temporarily stuck in the $50s.

Hasenfratz, seeing a value play in her midst, recently bought 17,200 shares of her company’s stock at an average price of $57.71 representing a total outlay of slightly less than $1 million.

Sure, when a CEO is earning millions each year, it’s easy to overlook such a purchase. However, there are lots of reasons why people sell stocks, but there’s only one reason they buy them.

They believe the share price is worth more than they paid. Hasenfratz thinks Linamar shares are worth more than $58.

And so do I. A lot more.    


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Fool contributor Will Ashworth has no position in any stocks mentioned. Magna International is a recommendation of Stock Advisor Canada.

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