A higher interest rate since 2022 is one factor that has affected businesses. Higher rates have increased the cost of capital, as most businesses use debt as a source of capital. For the auto part peers Magna International (TSX: MG) and Linamar (TSX: LNR), which are categorized in the consumer cyclical sector, their debt levels are similar when comparing their long-term debt-to-capital ratios, which are both just over 30%.
Image source: Getty Images
Stock charts can be telling
Stock charts can be telling. A comparison between Magna’s and Linamar’s stock price charts shows that the latter has been much more resilient since 2022.
MG and LNR data by YCharts
Interestingly, despite the selloff in Magna stock, Linamar actually trades at a lower valuation than Magna. At $57.63 per share at writing, Magna stock trades at a blended price-to-earnings ratio (P/E) of about 7.6, while at $65.14 per share, Linamar stock trades at a blended P/E of roughly 6.7. The lower P/E implies that Linamar could be a cheaper stock.
Solid price gains potential for patient investors
One analyst’s opinion on a stock could be biased. Therefore, it’s better to look at the consensus view instead. The analyst consensus price target provides an unbiased view of how big of a sale the cyclical stocks might offer.
According to TMX Group, the analyst consensus 12-month target for Magna stock is $78.32, representing a discount of about 26% or near-term upside potential of almost 36%. The consensus target for Linamar is $88.21, which represents a discount of 26% and near-term upside of 35%. So, based on the analyst consensus viewpoint, the shares offer a similar discount.
Magna and Linamar’s recent results
Magna last reported its quarterly results on May 3, witnessing sales growth of 2.8% year over year to US$11 billion. Earnings before interests and taxes (EBIT) rose 4.5% to US$469 million, and adjusted earnings per share fell 6.1% to US$1.08. Management reduced its 2024 sales forecast by about 2.7% (based on the midpoint) while maintaining the same EBIT margin of 5.4%-6.0%. Based on the reduced outlook and its long-term normal P/E of close to 11, the stock trades at a discount of 32%.
For Magna’s latest update, investors can look forward to it reporting its second-quarter results on August 2.
Linamar last reported its quarterly results on May 8, with double-digit sales and earnings growth. Other than experiencing margin expansion in its Mobility segment, it also enjoyed solid performance in its Industrials segment, which included results from diversifying into agricultural equipment. Overall, sales climbed 18.7% to $2.7 billion, and operating earnings rose 52% to $269 million. Consequently, normalized earnings per share climbed 30.8% year over year to $2.59.
For Linamar’s latest update, investors can look forward to it reporting its second-quarter results on August 8.
Recent results indicate that Linamar has delivered better business performance, which is why the stock has performed better lately. So, Linamar appears to be a better buy even though it offers a smaller dividend yield.
Because they’re cyclical stocks, interested investors should target to buy low and sell high. The stock chart above compares the stocks to the Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy.
