It’s time to buy Magna International (TSX:MG) stock while the recovery rally is just beginning. And I have every reason to be bullish on it. Magna’s stock bottomed out in October and has surged 17% since then. I am bullish on the stock and expect it to reach its 2021 high of $125, a 60% upside from today. What makes me bullish on the automotive components manufacturer?
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Reason: Healthy macroeconomic environment
The stock market is on fire, as the U.S. Federal Reserve ended the dilemma and officially signalled a pause in interest rate hikes. And to add to investors’ cheer, Fed chair Jerome Powell said that the central bank would discuss cutting interest rates from here on. While the Fed signalled a 75-basis-point rate cut in 2024, the market is pricing in a 1.5% rate cut.
Sales of high-ticket items like a car or a home are subject to the availability of a loan. Hence, their stock prices are sensitive to interest rate changes. An easing monetary policy is a good sign for all discretionary items like automotive. Because when borrowing becomes cheaper, people are willing to take loans.
Reason: Pending demand for electric vehicles
The sign of monetary easing has set the stage to brew consumer demand. If you remember, automotive demand was very high in 2021, as the world came out of the pandemic. Many people who had postponed their purchases during the pandemic rushed to buy a car, and the industry saw a sudden surge in demand. However, the industry grappled with semiconductor supply shortage as the reopening of chip factories burdened them with many other deliveries. Moreover, China was still facing constant lockdowns.
Several half-finished cars were waiting for the chip components. When the chip supply shortage eased in 2022, higher interest rates pulled down demand. While the demand-supply matrix went out of balance, Magna kept focusing on cost cutting, improving efficiency, maintaining manufacturing capacity, and innovating components for futuristic cars.
All these efforts will fructify when consumer demand picks up, and Magna’s clients boost orders.
Reason: Commitment to phase out fossil fuels
With finances and demand driving growth, the catalyst will be a push towards a green transition. In a recent United Nations climate summit COP28 held in UAE, +200 countries, including the United States and the United Kingdom, agreed to work towards the “beginning of the end” of the fossil fuel era. Transportation is the biggest consumer of fossil fuels.
This pledge to end the fossil fuel era would need an accelerated transition to electric vehicles (EVs). Unlike 2020, when only a few companies had an EV, many automakers have launched their EVs. And Magna is well equipped to cater to the demand for e-powertrain and other components that go into EVs.
Magna’s 85% stock price rally between November 1, 2020, and June 4, 2021, was driven by then-newly appointed U.S. president Joe Biden’s clean energy bill.
Investing case for Magna
The stock market prices the future earnings potential of a company. And if you have a compelling reason to believe that sales will improve in the next one to two years, you will see the stock price react today. After two-and-a-half years, conditions are becoming favourable for Magna. Hence, now is the right time to buy the stock before the market prices in the optimistic outlook.
