Magna International (TSX:MG)(NYSE:MGA) isn’t waiting around for the electrified world to reach its premises. One of the most promising tier-one suppliers with full-fledged vehicle manufacturing capabilities backed by its Steyr division, MG has already gotten its hands into the production of three OEM electric vehicles. Magna quickly realized that the 2% sales figure of EVs in 2019 could project to a staggering 15% by 2030. The icing on the cake was Magna’s agreement with Fisker in December 2020 that marked its first entry into contract manufacturing for an EV start-up.
Hence, MG is more than excited about this strategy to leverage its strong portfolio to scale for future mobility needs. Therefore, I think investors need to be equally excited about buying TSX stocks now more than ever.
Magna continues to ride high on a superb earnings streak
MG clocked a 2.3% dividend yield and an 18% payout ratio in 2020. Accordingly, investors continue to believe Magna will be able to cover dividend payments without breaking a sweat. Add to that a 4.4% free cash flow yield during the same period.
In fact, on a four-quarter-trailing basis, Magna’s free cash flows totaled $3.2 billion, indicating its robust business model ready to thrive in the current environment. Hence, I don’t consider Magna International’s shift to EV as an existential crisis. Instead, this move is all about expansion and long-term growth, which will allow the company to reduce its debt load and increase dividends over time.
February 2021 results indicate a rise in Magna’s sales per share by a whopping 17%, whereas earnings were up by 98%. So, while MG stock certainly doesn’t look like a value play at these levels, it’s expensive for a reason.
Moreover, MG saw a 31% rise in earnings above analysts’ expectations, thereby indicating a picture for solid long-term prospects. Also, Magna’s earnings are expected to grow by 91% in 2021 and by a further 16% in 2022, thereby adding to the home run for long-term investors.
MG bands forces with top chaebol to electrify the market
Magna and LG Electronics announced a joint venture in December 2020 to develop e-motors and chargers for certain automakers to champion the global shift towards vehicle electrification. With this joint venture, tentatively called LG Magna e-Powertrain, Magna expects to accelerate its scale of manufacturing electric powertrain systems, besides software and systems integration.
Successfully breaking through a two-year-plus downward spiraling resistance line, Magna International is now an excellent long-term holding option. It has consistently converted earnings into strong cash flow, allowing for increased capex investments and substantial returns to shareholders. With its moves into the EV sector, I think investors should now take the cue and bite into this stock.
Like this top EV pick? Here are a few more I'd consider today:
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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 Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool recommends Magna Int’l.