A global electric vehicle (EV) revolution is underway. The International Energy Agency (IEA) reports that electric cars’ share of total vehicle sales “more than tripled in three years,” from 4% in 2020 to 14% by 2022. Analysts at IEA forecast the revolution to continue gathering pace with 35% year-over-year growth in EV sales to comprise 18% of global vehicle sales for 2023.
Car parts and vehicle assembly giant Magna International (TSX:MG) can celebrate this year’s significant milestone. The $20.8 billion Canadian automotive industry stock could double sales in a unit that manufactures electric vehicle (EV) powertrains and parts this year. Although Magna’s EV drive systems still represent a significantly small component of Magna’s annual revenue, the automotive industry leader has a much bigger role to play in the EV revolution.
What is Magna International’s role in the EV revolution?
Magna International is a strategic design and manufacturing partner to a global automotive industry that is quickly transitioning to EV production. The company is restructuring some production plants to align with the EV revolution, and it’s increasing its capital expenditures to expand its EV components production capacity. Most of Magna’s 13 identifiable business lines are already aligned with the EV revolution – except for three.
Actually, three of Magna’s EV-related revenue-producing business lines are fast-growing high-margin businesses that may break into sustainable operating profits by 2025 as EV demand and smart-car adoption gather pace. The business lines include powertrains (eDrives and components), battery enclosures, and active safety.
Seven other business lines are well-aligned with the car of the future. They include vehicle seating, lighting, active aerodynamics, body and chassis, dual-clutch transmission systems, mirrors, and mechatronics. These businesses may grow at or above industry growth rates.
Magna has three business lines that may shrink in an EV-dominated future. These include manual transmission systems, fuel tanks, and all-wheel drives (AWD) or four-wheel drives (4WD). However, these business lines already contribute less than 14% of total revenue. Growing sales from powertrains, active safety, and battery enclosures will more than compensate for their decline.
How fast could EV-related sales grow?
Magna International’s new powertrain electrification, battery enclosures, and active safety businesses could power the company to strong revenue growth over the next five years.
In a recent investor presentation published in September, Magna estimates strong growth rates for its revolutionary business lines.
Its powertrain electrification and components sales may grow at a compound annual growth rate (CAGR) of 35% annually between 2022 and 2027 to reach a US$4 billion revenue run rate, up from a mere US$0.8 billion sales last year. Sales of battery enclosures may grow at a CAGR of 75% between 2022 and 2027 to US$2.5 billion annually, and active safety sales may post a CAGR of 45% to exceed US$4.2 billion by 2027, boosted by a recent acquisition of Veoneer Active Safety in 2023.
Active safety essentially includes sales of early warning and driver-assist systems that help detect, prevent, or reduce the impact of accidents.
Combined, powertrains, battery enclosures, and active safety revenue may grow from comprising 2% of total sales in 2022 to more than 15% of consolidated revenue in less than five years.
In total, Magna International targets growing total revenue from US$37.8 billion in 2022 to nearly US$49.5 billion by 2025. The company may easily meet growth targets if the global economy cooperates. Recessions may wreak havoc on the cyclical automotive industry’s sales and production economics.
Implications for dividend investors
Magna’s growing relevance in the EV production ecosystem is important for both growth-oriented and dividend-focused Magna stock investors. Higher sales and anticipated higher operating margins promise to increase the free cash flow available to shareholders – giving wider room for management to increase share repurchases, and steadily grow the dividend every year. Magna desperately needs to grow its cash flow right now.
Magna stock currently pays a US$0.46 per share dividend every quarter, yielding 3.4% annually. The company pays out about 56% of its earnings, so the dividend appears safe. However, dividend growth rates will remain very low given management’s EV-revolution-aligned plans to invest more than US$2.5 billion into the business (during 2023). Residual free cash flow shrank from US$2.4 billion in 2019 (before the pandemic) to US$201 million during the past 12 months.
Magna paid US$522 million in cash dividends to stock investors during the past 12 months. Payouts may persist, but dividend raises may remain in the low single-digits for longer as the company aggressively invests in high-growth EV-related business lines over the next five years.
