Magna International: Why I'm Starting a Position

| About: Magna International (MGA)

I've had a limit order on Magna International (NYSE:MGA) at $74.00 which just missed this morning, so I am going ahead with a market order in the upper $74s to get a 1.1% stake started in this auto supplier.

This will be the second name in the space we own, and I continue to be very impressed at the profitability of some of these suppliers in a wretched auto market. If auto sales can rebound from the 11-12M annual range back to 13-14M (peak was well over 16M) profits are going to do things no one ever expected. That said, I am not calling for any huge rebound in auto sales, but with all the cost cutting companies like Magna are reporting fantastic earnings even at this very poor annual run rate of auto sales. Even in the continuing Great Recession auto sales should still stay around 10M at trough.

Magna is still heavily European and North American reliant, which is a curse and opportunity - bad for now, but lots of opportunity for the future.

Technically the stock has pulled back to near the 50-day moving average for only the second time since the early July bottom. Same caveat as always: if the market implodes down to S&P 1010 (or lower) all purchases look stupid, stock will break support, etc, etc. (Click to enlarge)

Magna had one of the most impressive earning reports out of any company this quarter.back in early August. (full report here) The average content increase is quite impressive.

Via Wall Street Journal: (my comments in parenthesis)

  • Magna International Inc. swung to a second-quarter profit as sales jumped 63% on the back of a surge in North American vehicle production. The Canadian auto-parts maker also boosted its quarterly dividend to 30 cents a share from 18 cents, citing continued profitability in an improving auto market.
  • Magna, which last quarter also unveiled a share-restructuring proposal that would end founder Frank Stronach's voting control, earned $293 million, or $2.59 a share, on sales of $6.05 billion in its latest quarter. A year ago, Magna lost $205 million, or $1.83 a share, on sales of $3.71 billion.
  • Analysts polled by FactSet had been expecting earnings of $1.42 a share on sales of $5.4 billion.
  • On a conference call, Magna co-Chief Executive Don Walker said the strong results reflect in part the company's efforts to "restructure, right size and otherwise reduce costs across the organization." (read cut jobs, cut jobs, and cut jobs)
  • For 2010, Magna raised its sales projection by $1 billion to a range of $22 billion to $23 billion, based on light-vehicle production of about 11.5 million units in North America and about 12 million units in Europe.
  • The company noted that in the second quarter, North American vehicle production rose 75% and North American average dollar content per vehicle was up 27%. European vehicle production volumes rose 13%, with average dollar content per vehicle up 8%.
  • Company executives said the bulk of sales are still generated in Magna's key North American and Western European markets, but it will continue to invest in Asia, Russia and South America to diversify its business, which will be a "short-term negative" for margins.

They are also doing a complete reboot of their ownership structure as the founder is cashing out for huge bucks. Now, unlike most compensation packages where the public corporate CEO is just a big babysitter and his/her existence has little impact on the company, I begrudge this guy nothing; he created the company. As investors, this is a more normal share structure so it should help to bring more institutional ownership.

Via New York Times:

  • A Canadian court on Tuesday approved a plan by the auto parts giant Magna International to pay Frank Stronach, its founder, nearly $1 billion in exchange for giving up control. The ruling paves the way for Magna to end the dual-class share structure that had left control in the hands of Mr. Stronach, who came to Canada from Austria when he was 21 with only a couple of hundred dollars in his pocket.
  • Mr. Stronach, 77, will get $863 million worth of stock under the deal. He will give up his controlling class B shares in return for 7.5 percent of the company’s class A shares. He also gets $300 million in cash, control of a new joint venture between himself and Magna for electric car parts, and four years of lucrative consulting fees.

Per the company's web site:

Magna International designs, develops and manufactures technologically advanced automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers ("OEMs") of cars and light trucks. Our capabilities include the design, engineering, testing and manufacture of automotive interior systems; seating systems; closure systems; body and chassis systems; vision systems; electronic systems; exterior systems; powertrain systems; roof systems; hybrid and electric vehicles/systems; as well as complete vehicle engineering and assembly. We have approximately 76,000 employees in 242 manufacturing operations and 76 product development, engineering and sales centres in 25 countries.

Disclosure: Long Magna International in fund; no personal position

Original article