Drive around to General Motors Co. dealerships north of Toronto and it won’t take long to realize many stores don’t have a lot of vehicles to sell.
GM and Chrysler both scaled back production during their bankruptcy protection revamps and dealers also cut back for fear they might get stuck with cars and trucks no one wanted. Dealer inventories are in fact at historic lows in the United States. And all three Detroit automakers will be boosting the volumes of vehicles they make over the third and fourth quarter.
The output boost by its major customers, combined with the cost-cutting it has executed on its own, will allow Magna to rebuild its gross margins to more normal levels in the months ahead, RBC Capital Markets analyst Nick Morton said in a research note.
Magna reported a loss of $1.29 per share for its second quarter last week on a 45% drop in revenues. But it still managed to squeeze out a positive cash flow from operations and it has $1.1-billion in cash, Mr. Morton noted. He raised his target on Magna shares to $57 from $44, rating them outperform.
Mr. Morton wrote:
Magna offers liquidity with [a] market cap of $5.5-billion, relative safety with $9.50 a share of net cash, and value” at 3.7 times 2010 estimated pre-tax earnings.
Fadi Chamoun, an analyst at UBS Investment Research, takes a slightly more guarded view on Magna as an investment.
He argues that improving production volumes in the third quarter, and winning new business from competitors will help Magna’s revenues and earnings rebound.
“However, notwithstanding attractive potential upside from current [share price] levels, the path to recovery remains long and uncertain,” he said in a note.
Restructurings at GM and Chrysler remain fraught with risk and Magna’s bid for Opel is “high risk,” the analyst said. He rates Magna shares “neutral” with a 12-month target of $55, unchanged from his previous recommendation.