Magna International: Worth the Risk?

Magna International (MGA) is a global auto parts supplier. The stock was flirting with $100 last year, but due to the collapse of the auto industry, it now trades at just $26. It has a debt to equity of just 8% and produces a diversified plethora of parts in plants across the world. Does this stock represent a great value opportunity for long-term investors who expect auto sales to return in the long run?

Unfortunately, despite its low debt to equity ratio, the company is still a high risk. How? As we discussed here, one of the most important elements in determining a company's risk level is the concentration of its revenue by customer. For MGA, this is what it looks like:

click to enlarge

The chart above clearly demonstrates the high-risk nature of this company. The loss of any of these major customers reduces the value of this company tremendously. Also, note that the auto parts industry is characterized by high fixed costs, and therefore any changes in revenue have a magnified effect on the bottom line. In other words, while the loss of GM (GM) as a customer (to bankruptcy or to a competitor for example) would reduce revenues by 24%, it would reduce earnings by even more.

For a recent example we've discussed of a beaten-up auto industry stock that offers value without the concentration of customers, click here.

Disclosure: None

Comments

[Joe Friday:]

note that they are carrying about 4B in receivables, with close to half of those from the big three.
They have taken very little in the way of restructuring charges although the big three are off about 40% in total volume in the last year. I expect a big loss this quarter and large restructuring costs in the near future to bring their capacity in line wiht the new reality. There is likley to be a failure on the part of Chrysler and possibly GM as well. There are large restructuring charges and receivable write offs yet to to come. They do have 8B in shareholders equity, so they can take the hits that are coming, and remain in business, but the share price likely has some room to fall.

Jan 07 10:07 AM