Magna International Is Starting to Get Ridiculously Oversold

An undervalued stock with strong fundamentals and visible growth potential is a screaming buy for long-term gains.

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A rate cut has finally come to North America, courtesy of the Bank of Canada (BOC), the first G7 central bank to do so. But what was the reason for the quarter-point reduction to 4.75%? BOC Governor Tiff Macklem said, “Total consumer price index inflation has declined consistently over the course of this year, and indicators of underlying inflation increasingly point to a sustained easing.”

The official rate cut and possibly more will likely to prompt some investors to rebalance their portfolios. There could be great deals or cheap finds that could deliver long-term gains.

For example, Magna International (TSX:MG) looks grossly undervalued, if not an oversold stock. At $58.68 per share, the stock is down nearly 24% year to date and should be among the screaming buys in the post-rate cut environment.

Strong financial foundation

Magna International is an established name in the auto parts industry, operating for almost seven decades. The $16.85 billion company designs and manufactures components, assemblies, systems, subsystems, and modules for original equipment manufacturers (OEM) of vehicles and light trucks globally.

The automotive industry is changing rapidly, and according to its chief executive officer (CEO), Swami Kotagari, Magna continues to thrive and adapt. At the end of 2023, he said a strong financial foundation remains the company’s hallmark. Last year, sales and net income rose 13% and 104.9% to US$42.8 billion and US$1.2 billion.

Kotagari added that various actions such as consolidation, restructuring, and cost containment mitigated short- and mid-term macroeconomic pressures and led to solid earnings growth. Magna simultaneously intensified efforts in core business and adopted advanced technologies to enhance long-term productivity.

In his letter to shareholders, Kotagari said management is executing plans to help Magna outgrow the market, expand margins over time, and generate strong returns on investments. The company is well-positioned for the tremendous opportunities ahead as it prepares to shift the portfolio toward the Car of the Future.

Profit drop in Q1 2024

The production of cars and light trucks in North America, Europe, and China affects Magna International’s operating results. In the first quarter (Q1) of 2024, sales increased 2.8% to US$10.97 billion versus Q1 2023, while net income fell 88% year over year to US$26 million.

However, the profit drop was due to the US$316 million in asset impairments and restructuring costs related to Fisker, not weak vehicle production. Magna manufactures the Ocean SUV for Fisker, a distressed electric vehicle company. Nevertheless, cash from operating activities increased 34% to US$261 million from a year ago.

Visible growth potential

Magna International’s underperformance in 2024 is not a setback, and the 4.43% dividend yield should compensate for the temporary weakness. The company will leverage its core expertise to capitalize on near- and long-term opportunities beyond the traditional manufacturing and supply of vehicles.

New business models in specific market segments are coming, including autonomous mobile robots. Industry experts project the market to grow four times its size today. Expect Magna International to lead the transformation in the mobility landscape and realize its vision for the Car of the Future.

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 Christopher Liew 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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