Magna International (TSX:MG) and Linamar (TSX:LNR) are both auto parts companies in the consumer cyclical sector. So, their stocks are generally more volatile than the market. For example, last Friday, after reporting solid third-quarter (Q3) results, Magna stock jumped north of 8% on the day, which also triggered the stock of peer Linamar to rise over 5%. These kinds of stocks could surprise on the upside as well as downside based on news.
If investors took the stocks as buy-and-hold ideas, as shown in the graph below, they would have gotten similar 10-year returns as the Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy but would have experienced higher volatility. It follows that investors might be able to book higher returns by aiming to buy low and sell high in Magna or Linamar stocks.
MG, LNR, and XIU Total Return Level data by YCharts
Recent results
Year to date, Magna witnessed sales growth of 14% to US$32.3 billion, adjusted earnings before interest and taxes (EBIT) growth of 25% to US$1.68 billion, and adjusted earnings-per-share (EPS) growth of 26% to US$4.15. To be clear, the high growth is partly a comeback from the setback in 2022, in which Magna experienced adjusted EPS falling approximately 20%. Management has also been working on offsetting inflationary pressures, reducing expenses, and optimizing its cost structure.
Linamar is expected to report its Q3 results tomorrow. It has been chugging along since reporting its Q2 results in August, including acquiring assets from a tier-one supplier of automotive components for about US$70 million. In the first half of the year, Linamar saw sales growth of 29% to $4.8 billion and diluted EPS rising 66% to $4.59. Notably, its operating margin almost doubles Magna’s.
Valuation and dividend
Both cyclical stocks appear to be cheap. At $73.13 per share, Magna stock trades at about 10.5 times adjusted earnings with double-digit earnings growth potential over the next few years. The stock also offers a dividend yield of about 3.4%. Importantly, it has increased its dividend by about 13 consecutive years with a 15-year dividend-growth rate of 12.9%.
At $63.94 per share, Linamar stock trades at about 7.8 times adjusted earnings with double-digit earnings growth potential over the next few years. Additionally, the stock provides a dividend yield of close to 1.4%. Unlike Magna stock, Linamar doesn’t consistently increase its dividend and, in fact, cut its dividend as recently as 2020 when the pandemic brought challenges to supply chains and businesses around the world.
Is Magna International or Linamar stock a better buy?
According to Morningstar, Linamar’s five-year return on assets was 5.5%, which was higher than Magna’s 4.7%. However, Linamar’s return on equity was 10.4% in the period versus Magna’s 11.5%. As well, Linamar’s five-year return on invested capital was 7.6%, which was also lower than Magna’s 8.4%.
At the end of the day, Magna stock provides a large and more consistent dividend, which can help deliver a more consistent return for investors. The company also has a larger scale and enjoys an S&P credit rating of A-. So, Magna is likely a better buy.
