Magna International (TSX: MG) and Linamar (TSX: LNR) are peers in the auto parts industry under the consumer cyclical sector. So, their businesses are subject to the booms and busts of the economy. As you may know, the North American economy is a bit gloomy, as inflation has been relatively high and central banks have raised interest rates to curb inflation.
These stocks tend to experience above-average volatility — about 1.5 times the market volatility. They also usually do poorly in recessions. However, they would bottom at some point in a recession and could make a huge comeback. Although no one can pinpoint the low, unless in hindsight, high-risk investors might take the opportunity to buy at lows in a recession.
Let’s compare the peers to see which may be a better buy today.
The businesses
Magna’s business spans 30 countries with 351 manufacturing operations and 103 product development, engineering and sales centres. Its business segments include body exteriors and structures, power and vision, seating systems, and complete vehicles. Its business results predominantly depend on the car and light truck production levels of its customers in North America, Europe, and China.
Linamar operates in 19 countries with about 69 manufacturing locations. It consists of two business segments. The industrial segment is made of Skyjack, which manufactures for the aerial work platform industry, MacDon, and Salford. MacDon and Salford manufacture for the agricultural industry. Its mobility segment caters to the electric and traditional vehicle markets. This segment makes up about 72% of its sales.
Recent results
In the first half of the year, Magna’s revenue climbed close to 14% to US$21,655 million, and its adjusted earnings before interests and taxes (EBIT) climbed 20% to US$1,040 million year over year. Results were driven by the body exteriors and structures and the seating systems segments that experienced sales growth and margin expansion. Overall, its adjusted EBIT margin expanded to 4.80% from 4.55%. Its adjusted earnings per share jumped almost 24% to US$2.61. This was a rebound of results from a down year in 2022.
In the first half of the year, Linamar generated revenue growth of close to 29% to $4,845.5 million, while operating earnings rose 41% to $391 million year over year. Its operating margin expanded to 8.07% from 7.39%. Earnings per share jumped 66% to $4.59.
Price action
Year to date, Linamar has had better price strength, with the stock up about 12% versus Magna’s appreciation of close to 4%. Stretching out to a year, they have moved largely in tandem with Linamar; Linamar is up about 6%, and Magna is up roughly 4%.
XIU, MG, and LNR Total Return Level data by YCharts
In the last 10 years, Magna delivered annualized returns of about 8.9%. Linamar’s return of close to 8.7% wasn’t far behind. Magna’s higher dividend yield and better dividend history have certainly played a part in its returns. They beat the Canadian market returns of about 8.2% per year in the period but with much greater volatility.
Which is a better buy?
At $78.85 per share, Magna trades at about 11.7 times earnings. Analysts think the stock trades at a discount of about 18%. It also offers a dividend yield of almost 3.2%, which appears to be sustainable. It has increased its dividend for 13 consecutive years with a 10-year dividend-growth rate of 12.6%.
At $68.86 per share, Linamar trades at about 8.9 times earnings. Analysts think the stock trades at a discount of about 22%. It offers a dividend yield of about 1.3%. The stock doesn’t have as good a track record of dividend payments as Magna, but it has increased its dividend every year since 2021.
Both can grow their earnings at a double-digit rate in an economic expansion that may be possible over the next five years. Given Linamar’s cheaper valuation, it can potentially deliver higher returns than Magna. However, Magna can provide better peace of mind with its dividend. Magna also commands a premium multiple to Linamar. So, Magna appears to be a lower-risk buy. For either stock, investors need to employ active investing to target good buy and sell points.
