Magna International (TSX:MG) is one of the world’s largest automotive suppliers. It designs, develops, and manufactures automotive components, systems, and modules for various automotive manufacturers. Amid improvement in broader market conditions and better-than-expected first-quarter sales, MG has witnessed solid buying, with its stock price rising by 33.2% compared to its April lows. Despite the recent surge, the company’s stock still trades 1.5% lower for the year and is down 13.3% compared to its 52-week high. Meanwhile, let’s examine its first-quarter performance, growth prospects, and valuation to determine buying opportunities in the stock.
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MG’s first-quarter performance
In May, MG reported its first-quarter results, with its top line coming at US$10.07 billion, beating analysts’ expectations by US$370 million. However, year over year, its revenue declined 8% amid lower global light vehicle production, a decline in complete vehicle assembly volumes due to the end of production for specific programs, and a weakening of foreign currencies against the U.S. dollar. The company experienced production declines of 8% and 5% in Europe and North America, respectively. However, a 2% increase in production in China partially offset the decline in vehicle production in other countries.
Moreover, its adjusted EBIT (earnings before interest and tax) fell 32.5% to $354 million amid reduced earnings from lower sales and higher net warranty expenses related to its seating business. Meanwhile, its net income stood at $146 million, a substantial improvement from $9 million in the previous year’s quarter. However, removing one-time or special items, its adjusted net income stood at $219 million, representing a 29.6% decline from the previous year’s quarter. Also, its adjusted EPS (earnings per share) fell 27.8% from the prior year’s quarter to $0.78, which was $0.08 lower than the analysts’ expectations.
Meanwhile, MG provided $77 million of cash during the quarter from its operating activities. However, due to its investing and financing activities, its cash resources declined by $200 million to $1.1 billion. Despite the decline, the company is well-equipped to fund its growth initiatives. Now, let’s look at its growth prospects.
MG’s growth prospects
The automotive sector is going through a rapid transformation, shifting from traditional combustion engines to electric vehicles. Additionally, automotive companies are integrating newer technologies, such as AI (artificial intelligence) and IoT (Internet of Things), into their vehicles. Amid these transformations, MG is focusing on developing innovative products and making strategic partnerships to strengthen its position. The company has collaborated with NVIDIA to produce AI-powered and scalable solutions for ADAS (Advanced Driver Assistance Systems) and autonomous driving systems.
Although its long-term growth prospects look healthy, it faces significant tariff risks in the near term. Meanwhile, the company’s management projects its topline to come between $40 billion $41.6 billion, with the midpoint of the guidance presenting a 4.8% decline from the previous year. The management also expects its adjusted EBIT margin to be between 5.1% and 5.6%, compared to 5.4% in the last year.
Investors’ takeaway
Despite the recent increase in its stock price, MG trades at an attractive valuation, with its NTM (next-12-month) price-to-sales and NTM price-to-earnings multiples of 0.3 and 8.2, respectively. Additionally, the company also rewards its shareholders with share repurchases and dividends. In the first quarter, the company paid $136 million of dividends and repurchased shares worth $51 million. Its quarterly dividend payout of $0.485/share translates into a forward dividend yield of 4.66%.
Considering all these factors, I believe investors with a longer investment horizon can accumulate the stock to reap superior returns despite the tariff risks.
