Some investors rebalance their stock portfolios at the start of the year. There’s also the January effect phenomenon, when stock prices, especially small-cap stocks, tend to rise or outperform during the month. However, for value investors, the search is on for companies trading below their actual values and with long-term potential.
One Canadian stock that deserves serious consideration right now is Martinrea International (TSX:MRE). At $13.52 per share, the stock is down nearly 6% year to date. Considering the 29% total return in 2023, the weakness is a buying opportunity. MRE also pays a modest 1.5% dividend.
Furthermore, Martinrea reported record results in Q3 2023 and expects an expansion in the automotive industry in the coming years. Market analysts covering the stock recommend a buy rating for the value stock.
Business overview
The $1.1 billion company from Vaughan is a fast-growing automotive parts supplier and a Tier One supplier in lightweight structures and propulsion systems. Martinrea’s reach is global, with sales and engineering centres in 10 countries across five continents.
Martinrea operates in a competitive landscape but stands out because of its high-quality products and strong commercial groups. The company takes pride in its manufacturing system, flexible build process, high-frequency delivery, and efficient material flow.
Management launched Project Breakthrough in 2019 intending to grow revenue and margins. Thus far, the project has been successful except for the losses in 2020, the COVID year.
Martinrea is forward-looking as it prepares to capitalize on the electrification growth opportunities in electric vehicles (EV), plug-in hybrid electric vehicles (PHEV), and internal combustion engine vehicles (ICE).
More importantly, Martinrea continues to win business awards from new and existing clients. After three quarters in 2023, total business awards reached $300 million in annualized sales.
Record quarterly results
In the three months ending September 30, 2023, total sales and net income rose 15.5% and 49.5% respectively to $1.4 billion and $53.7 million versus Q3 2022. Besides the $80 million new business awards during the quarter, free cash flow (FCF) reached $79.2 million; management projects hitting record FCF in the full year 2023.
Fortunately, the strike of the United Auto Workers (UAW) employees in Detroit last year did not significantly impact the third quarter performance. “We continue to perform at a high level, our balance sheet is in great shape, and we are executing on our capital allocation priorities,” said Rob Wildeboer, executive chairman of Martinrea.
Wildeboer adds that management believes the automotive industry is stable, and volumes should expand in the coming years, especially in North America. The region’s economy is in good shape, the demand for vehicles remains high, and vehicle inventories are low. Interest rate cuts in 2024 could also boost the business.
Winning strategy
Warren Buffett, the GOAT of investing, is a proponent of value investing. The GOAT of investing identifies stocks trading at less than their intrinsic value but with long-term potential.
Unlike tech stocks, Martinrea may not be a high-flyer, although organic opportunities assure business growth and enhanced shareholder value. The fundamentals are solid and capable of generating quality earnings.
