When it comes to growth stocks, what first pops into investors’ minds are probably tech stocks or even healthcare stocks, like biotech. However, there’s a curious group of stocks that can be considered growth stocks sometimes. These are cyclical stocks whose earnings per share (EPS) can experience double-digit growth rates in some years.
I’ll talk about Magna International (TSX:MG)(NYSE:MGA) and its smaller peer Linamar (TSX:LNR) today. The auto parts makers have been more or less negatively impacted by China’s COVID-19 lockdowns, the Russia-Ukraine war, and the semi-conductor chip shortage recently. This provides a decent opportunity to buy shares at a good value.
Magna International stock
What does it mean for Magna to be a cyclical stock? Other than experiencing high growth in certain years, it can also experience earnings decline in others. The following illustrates the kind of double-digit growth rate that Magna can experience.
- From 2011 to 2014, Magna stock increased its EPS at a compound annual growth rate (CAGR) of approximately 23%.
- From 2016 to 2018, the cyclical stock experienced EPS growth of about 13% per year.
- In 2021, its EPS jumped 30%.
However, it also experienced an EPS drop of 1% in 2015 and 23% per year from 2018 to 2020.
Notably, though, Magna is a Canadian Dividend Aristocrat. The dividend stock has increased its dividend every year since 2010, which is a great achievement for a cyclical stock that has unpredictable earnings. Having management support, maintaining a low payout ratio through economic cycles, and having a positive figure of retained earnings (in fact, over US$9 billion) are reasons that Magna stock pays a healthy and growing dividend.
How do Magna’s smoothed-out results look like in the long run? From 2010 to 2021, it increased its EPS at a CAGR of 8.2% and dividend per share (DPS) by about 17%. In the last decade or so, its payout ratio only reached as high as under 41%. And the payout ratio is expected to hit 36% this year. Its dividend yield of 2.7% is safe, and investors can anticipate dividend growth to ensue.
For the trailing 12 months (TTM), Magna’s gross profit margin and operating margin were 13.6% and 4.7%, respectively.
Linamar’s operating environment is similar to Magna’s. As a result, it also experiences similar risks. From 2010 to 2021, Linamar increased its EPS at a CAGR of 15.3% and DPS by about 7%. Linamar provides a safe yield of 1.4%. Linamar’s management seems more keen to drive business growth over providing shareholder value via a consistently growing dividend. A good trend to see is its retained earnings have at least increased over the last three years and have reached about $4.5 billion.
Its TTM gross profit margin and operating margin were 12.6% and 7.2%, respectively. Interestingly, Linamar officially announced Linamar MedTech, a new group that focuses on manufacturing solutions for Medical Devices and Precision Medical Components. It sounds like the group has grown large enough over the last few years for the company to make this announcement. The pie in this area is growing and earnings from this group should be more stable and could potentially be a higher-margin business.
The Foolish investor takeaway
Patient investors in either stock can potentially enjoy substantial price appreciation over the next three to five years. According to the analyst consensus 12-month price targets, Magna stock and Linamar are undervalued by about 20% and 25%, respectively. FactSet data also projects they will experience a double-digit EPS growth rate through 2024.