Many TSX stocks have been on a downward trend for quite some time. But this phenomenal TSX stock hasn’t been this cheap since the pandemic. The stock in question is Magna International (TSX:MG), one of the largest auto components suppliers. What caused this downtrend? Is this a permanent descent or a phase that will pass?
A phenomenal TSX stock that hasn’t been this cheap in a while
Magna’s stock price downtrend began in January 2022 and has since fallen 46%. At the time of the writing, Magna stock made a new 52-week low of below $60, a level last seen in 2020. Even the Bank of Canada’s interest rate cut could not spur growth in the stock price. The reason for this is the continued business uncertainty.
The automotive industry has been going through a tough time. High inflation increased the cost of living, shifting consumer spending from discretionary to essential. The Bank of Canada increased interest rates to ease inflation, making borrowing expensive. Both these events impacted automotive demand in 2021 and 2022.
It saw a brief upward momentum in the 2022 holiday season when car sales improved, followed by strong sales in 2023. The piled-up car inventory sold out as the 2021 semiconductor shortage eased.
Magna stock is trading at 7.8 times its next 12-months earnings per share (EPS). It is cheaper than rival Autoliv trading at 12.4 times its forward price-to-earnings (P/E) ratio. Magna has revised its 2024 outlook downwards.
Magna’s long-term outlook
Automotive is a cyclical industry, as most people now own a car. The next trend in cars is replacement/upgrade to advanced vehicles. Magna is at the forefront of this trend, investing in new technologies to cater to automakers’ advanced needs. The electric vehicle (EV) trend triggered in 2021 has undergone an economic setback from supply chain issues and demand slowdown. However, this trend is here to stay.
Alongside EVs, two more trends are coming up. The trend of self-driving cars and hydrogen cars. However, these trends will take more than a decade to fructify. Until then, the EV trend is already here.
As interest rates fall and consumer income increases, demand for EVs will pick up. That is when Magna stock could begin its ascend that could last for two years or more till the EV demand normalizes.
Understanding Magna’s cyclical momentum
A similar cyclical trend was visible in the 2011-2016 period. Magna stock peaked in early 2011 as the economy recovered from the 2009 Financial crisis. For those who remember the 2009 crisis, automakers Ford, Chrysler, and General Motors were near bankruptcy as people were out of jobs and income. With no strong disposable income, vehicle production took a hit.
In 2010-11, the North American automotive market revived driving Magna stock up more than 187% to its 2011 peak. However, the stock fell more than 33% from this peak as vehicle production in Europe remained weak. At that time, Magna continued to invest in its footprint. These efforts paid off in late 2012 as light vehicle production finally picked up. The cycle switched from downturn to upturn driving Magna’s stock up more than 200% in the next two years.
History might repeat itself. The EV boom drove Magna stock up 170% from its April 2020 dip in just 12 months. However, a series of headwinds put a speed break on its EV trend. The stock is trading near its pandemic low. It is difficult to tell when this cyclical downturn will end. However, you can keep adding more Magna stocks throughout the downturn and reduce your average price per share. When the cycle turns, you could see a 150-200% jump in the stock price.
You can set a target price for Magna stock. When it reaches that price, don’t hesitate to book profits. With cyclical stocks, it is beneficial to sell during the cyclical upturn as you can buy them at a heavy discount during the downturn.
