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.
Bottom line
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.
