Magna International (TSX:MG) is one of the largest automotive component suppliers in the world, with 338 manufacturing facilities across 28 countries. After being under pressure over the last few years, the company has witnessed healthy buying over the previous few months. Its stock price has increased by over 49% compared to its April lows, amid a solid second-quarter performance, improved profitability, and an increase in management’s 2025 guidance. Despite recent gains, the auto parts manufacturer still trades at a significant discount to its 2021 highs.
Therefore, let’s assess its second-quarter performance, growth prospects, and valuation to determine buying opportunities in the stock.
Magna’s second-quarter performance
In the second quarter, Magna reported revenue of US$10.6 billion, representing a 3% decline from the same quarter in the previous year. A 6% and 2% drop in light vehicle production in North America and Europe, a decrease in complete vehicle assembly volumes, and the closure of specific programs led to a decline in its revenue. However, new program launches, favourable currency translations, and customer price increases offset some of the declines.
Despite the decline in its revenue, the company’s adjusted EBIT (earnings before interest and taxes) rose 1% to US$583 million. Its continued productivity and efficiency improvements amid its operational excellence initiatives and restructuring activities, and higher equity incomes, led to the expansion of its adjusted EBIT. However, higher tariff expenses and reduced earnings from lower sales offset some of the increases. Meanwhile, its adjusted EBIT margin increased by 20 basis points to 5.2%.
Furthermore, the company generated net income of US$379 million, representing a 21.1% increase from the same quarter in the previous year. However, removing special or one-time items, its adjusted EPS (earnings per share) stood at US$407 million or US$1.44 per share, representing a 6.7% increase from the previous year’s quarter. It also generated US$762 million of cash from its operations, while its free cash flows for the quarter stood at $US$301 million. Its free cash flows represent a significant increase from US$123 million in the previous year’s quarter. Now, let’s look at its growth prospects.
Magna’s growth prospects
Despite the challenging macro environment, Magna continues to win new business and develop new automotive technologies. Additionally, it has settled most of its net tariff exposure for this year with multiple original equipment manufacturers (OEMs), while continuing to work with the remaining customers and suppliers to mitigate its exposure further. Amid these initiatives and recent updates on tariff rates, the company’s management has reduced its annualized tariff exposure from US$250 million to US$200 million.
Furthermore, the company continues to focus on executing its operational excellence activities and cost-saving programs, which could boost its profitability in the coming quarters. On the back of its solid performance and these growth initiatives, Magna’s management has raised its guidance for this year. Now, the management’s revenue projection for this year is $40.4 billion to $42 billion, while its adjusted EBIT margin is between 5.2% and 5.6%. The management also projects its 2025 free cash flows to come between US$800 million and US$1 billion. Therefore, the company’s growth prospects look reasonable.
Investors’ takeaway
Despite the substantial appreciation in its stock price, Magna continues to trade at an attractive valuation, with its NTM (next-12-month) price-to-sales and NTM price-to-earnings multiples of 0.3 and 8.7, respectively. Additionally, the company also rewards its shareholders with share repurchases and dividend payouts. In the first two quarters, it has repurchased 1.3 million shares and currently offers a quarterly dividend payout of US$0.485/share, with its forward dividend yield at 4.13%. Considering all these factors, I believe Magna would be an excellent buy at these levels.
