Macroeconomic trends tend to eventually spill over onto corporate balance sheets. A shift in regulations, a change in tariffs, or a disruption in demand can all have long-term consequences for companies and their shareholders.
Since 2016, automotive parts juggernaut Magna International Inc. (TSX:MG)(NYSE:MGA) has been at the epicenter of not just one, but three separate political and economic shifts playing out across the globe. The $22-billion company faces trade tensions in North America, a messy Brexit in Europe, and the rise of electric vehicles from Oslo to Shanghai.
For top-down stock pickers, Magna provides a microcosm of the global automotive industry. Here’s a closer look at how each of these three trends impacts the company’s bottom line.
Trump
Of Magna’s 174,000 employees, nearly a third are based in either the United States or Canada. This puts the company squarely in the middle of the NAFTA 2.0 shift. Trump’s current tariffs on car parts manufactured in Canada along with his ongoing trade war with China may have cut $60 million a year from Magna’s top line.
However, when the new deal is implemented, these tariffs will disappear, and it now appears that tensions with China may be dissipating as well. These positive developments will undoubtedly be reflected in Magna’s results in 2019 and beyond. Near-term certainty over trade relationships will help the company make long-term investments to create more value for shareholders.
Brexit
The British voted to leave the European Union only a month after Magna announced plans to expand its operations in the United Kingdom. The company currently employs nearly 2,900 people in the UK, has significant operations in Germany’s auto sector, and generated 42% of its total sales in Europe last year.
Magna’s operations are undeniably exposed to this region, and a messy divorce could have a tangible impact on its bottom line. In fact, the company’s stock took a massive dip when the Brexit referendum results were announced in 2016, thereby highlighting this exposure.
However, the cloud of uncertainty has pushed Magna’s valuation to an attractively low spot. The market price implies a price-to-earnings ratio of just 10.3, a price-to-book ratio of 2.1, and the dividend yield is 3%. Also, the company’s market value is just 54% of its annual sales.
Self-driving cars
If the NAFTA deal and relative undervaluation weren’t enough to catch your attention, perhaps Magna’s investments in technology will. The company leveraged its experience in car part manufacturing to create MAX4 – a fully autonomous driving platform that’s compatible with all vehicles.
Earlier this year the company also announced a partnership with Google’s Waymo to manufacture self-driving cars in southeast Michigan. Waymo is, by all expert accounts, the clear leader in this space. This partnership is a clear green flag for investors seeking growth and a ticket to ride the wave of disruption sweeping the global mobility industry.
Bottom line
Entrenched global market share, unparalleled scale, a favourable NAFTA 2.0 deal and critical investments in self-driving technology make Magna one of the best bets in the automotive sector. Meanwhile, the uncertainty over Brexit has pushed the stock down to an attractive valuation.
Investors should take a closer look here.
