Automobile ancillary companies such as Magna International (TSX:MG) and Linamar (TSX:LNR) continue to trade well below all-time highs. But despite the recent selloff, both the TSX stocks have outpaced the broader index in the last 10 years.
For instance, shares of Magna International have returned 154% in the last 10 years, while Linamar stock is up 144% after adjusting for dividends. Comparatively, the TSX index has gained 126% in this period.
Let’s see which stock between Magna International and Linamar is a better buy in July 2023.
Source: Getty Images
Magna International stock
Valued at a market cap of $22 billion, Magna International designs and manufactures components, systems, and modules for original equipment manufacturers of vehicles and light trucks.
Despite a sluggish macro environment, analysts expect Magna to report revenue of $55.34 billion in 2023, an increase of 9.4% year over year. Its adjusted earnings are forecast to rise 20.6% to $6.61 per share.
Priced at 0.4 times forward sales and 10.5 times forward earnings, Magna stock is very cheap. It also pays shareholders a quarterly dividend of $0.619 per share, indicating a yield of 3.2%. These payouts have increased at an annual rate of 14.5% in the last 10 years, which is quite generous for a cyclical stock.
With more than 60 customers in 29 countries, Magna owns and operates 341 manufacturing facilities. It is the fourth-largest automotive parts supplier globally, offering investors exposure to a company that enjoys a leadership position and a wide economic moat.
Magna increased sales by 11% year over year to US$10.7 billion due to higher light vehicle production across the world, the launch of new programs, and higher complete vehicle assembly volumes.
Magna stock is up just 2.5% year to date. But analysts remain bullish on the TSX giant and expect shares to gain 15.6% annually in the next 12 months. After including dividends, total returns will be closer to 19%.
Linamar stock
Compared to Magna International, Linamar is a much smaller player and is valued at $4.3 billion by market cap. It is the 65th largest automotive parts supplier in the world, with operations in North America, Europe, and Asia.
In the first quarter (Q1) of 2023, Linamar increased sales by 28.9% year over year to $2.3 billion. Comparatively, EBITDA (earnings before interest, tax, depreciation, and amortization) was up 40.9% at $297 million, which showcases the ability of the company to absorb rising costs efficiently.
Linamar emphasized it benefitted from a strong performance in the industrial segment as well as by launching a business and recovering share in the mobility vertical.
Analysts expect sales for Linamar to rise from $7.92 billion in 2022 to $9.12 billion in 2023, an increase of 15.2% year over year. Comparatively, adjusted earnings might expand by 37% to $8.61 per share.
Priced at 0.55 times forward sales and eight times forward earnings, Linamar stock also trades at a discount of 24% to consensus price target estimates.
The company pays shareholders an annual dividend of $0.88 per share, indicating a yield of 1.26%. These payouts have risen by 9% annually in the last two decades.
The Foolish takeaway
Considering the earnings expansion potential, valuation, and estimated revenue growth rates of the two companies, Linamar stock is a better buy today.
