Magna Stock: Buy, Sell, or Hold?

Magna stock (TSX:MG) has shrunk down to 52-week lows, but this might offer long-term investors a serious opportunity.

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Magna International (TSX:MG) can’t catch a break. Shares of the car parts manufacturer have shrunk this last year, falling even further after earnings. What’s more, the company’s share price is now at 52-week lows. Yet if you’re a long-term investor seeking out a deal, it could be argued now is the time to dive into Magna stock. So let’s take a look.

Buy

As mentioned, shares of Magna stock have been trading near 52-week lows. So that could mean there is an opportunity for investors willing to buy and wait. For example, Magna recently reported a 3% increase in sales to US$11 billion for the first quarter of 2024, outperforming the 2% rise in global light vehicle production. This indicates Magna’s ability to grow its revenue faster than the overall market, suggesting strong operational capabilities and market demand for its products.

What’s more, Magna generated $591 million in cash from operations before changes in operating assets and liabilities, and paid dividends of $134 million in Q1 2024. While the reported diluted earnings per share (EPS) was low at US$0.03 due to significant impairment charges, the adjusted diluted EPS was much healthier at US$1.08. This adjustment reflects the underlying profitability of Magna’s core operations when excluding extraordinary items.

Then there is the company’s acquisition of Veoneer Active Safety and the launch of new programs that have positively impacted sales. These strategic moves indicate Magna’s proactive approach to expanding its product offerings and market reach, particularly in the growing active safety and advanced driver assistance systems (ADAS) market.

Sell

But, of course, there is a reason shares in the stock have been dropping. Despite Magna International’s notable performance improvements and strategic initiatives, several factors suggest that the stock might be a sell at its current standing on the TSX.

For instance, net income for Q1 2024 plummeted to US$9 million from US$209 million in Q1 2023. Similarly, diluted EPS fell sharply from US$0.73 to US$0.03. Income from operations before income taxes decreased significantly from US$275 million to US$34 million, highlighting a substantial drop in profitability.

Add onto this the company’s US$316 million impairment and restructuring costs, as well as modest sales increases, and it hasn’t been looking great for Magna stock. With higher costs and lower sales, the company will need to prove itself in other ways.

Hold

So should investors instead consider simply holding Magna stock for now? After all, while Magna’s sales increased by 3% to US$11 billion in Q1 2024, it outpaced the 2% rise in global light vehicle production. This demonstrates the company’s ability to grow revenues despite industry headwinds.

Plus, adjusted earnings before interest and taxes (EBIT) increased 4.5 percent to US$469 million in Q1 2024 over the year-ago quarter. This improvement is attributed to higher sales, better operational efficiencies, cost containment measures, and successful customer recoveries.

Perhaps in this case we should zoom out and consider the macro environment. The automotive industry faces uncertainties, particularly with the electrification of vehicles and product mix variations. These factors could impact Magna’s ability to expand margins as planned. 

Bottom line

While Magna shows robust sales growth and operational improvements, significant challenges such as high impairment charges, declining net income, and diluted EPS cannot be ignored. The company’s strategic initiatives and strong cash flow are positives, but the overall economic and industry uncertainties warrant a cautious approach. In the future, investors should continue to watch Magna stock, monitoring upcoming quarters for an improvement in both net income and EPS, as well as further progress in efficiency and strategic investments.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Magna International. The Motley Fool has a disclosure policy.

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