Magna International: Earnings Scorecard

Nov.17.10 | About: Magna International (MGA)

Magna International Inc. (MGA) reported its third quarter results for the year on November 4, 2010, outperforming the Zacks Consensus Estimate by 56 cents per share. The market reacted positively, with share prices rising subsequent to the earnings release.

Analysts were optimistic given the company’s commendable results and better outlook as most of them covering the stock have revised the estimates upward. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the short-term along with the long-term outlook for the stock.

Earnings Report Highlights
Magna reported about fivefold increase in profit to $241 million from $51 million in the third quarter of 2009 given the 28% increase in light vehicle production in North America and the ongoing restructuring actions adopted by the company.

However, the increase in EPS was somewhat offset by an increase in the weighted average number of shares outstanding to 116.8 million during the quarter from 112.9 million in the third quarter of 2009.

Revenues in the quarter escalated 27% to $5.94 billion, driven by increases in the company’s sales in all the segments. It was higher than the Zacks Consensus Estimate of $5.33 billion.

Due to the improved profits, the company raised its quarterly cash dividend by 20% to 36 cents per share from 30 cents per share for the third quarter of the year. After giving effect to the two-for-one stock split, the increased dividend will be transformed into 18 cents per share, up from 15 cents per share.

For the full year 2010, Magna anticipates sales in the range of $23.5 billion–$24 billion based on light vehicle production volumes of 11.8 million units in North America and 12.6 million units in Europe.

(Read our full coverage on this earnings report: Magna's Profit Soars)

Earnings Estimate Revisions – Overview
Estimates have improved since the earnings release, implying analysts’ optimism about the stock. Beside the higher earnings, analysts upgrades were based on the company’s decision to hike its quarterly dividend as well as a noteworthy increase in operating cash flow.

In the first nine months of the year, Magna’s cash flow from operations improved significantly to $958 million from $13 million in the same period of 2009 due to an increase in net income, offset partially by a $185 million decrease in items not involving cash flows.

Further, the company has predicted sales for 2010 that were higher than 2009 by 35%–38%. Lets move into the earnings estimate details.

Agreement of Estimate Revisions
There is a strong agreement among the analysts regarding the outlook of Magna’s earnings. Out of 15 analysts covering the stock, 12 analysts have revised upward the estimate for 2010 while only one has revised it downward over the last 30 days.

The trend is even stronger for 2011. As many as 14 analysts have revised the estimate upward while none moved in a downward direction over the last 30 days. Over the last 7 days, there was only one upward revision for both 2010 and 2011 and no downward revision. This impressive trend in estimate revisions promises a consistent stream of earnings.

Magnitude of Estimate Revisions
The earnings estimate for 2010 has been revised upward by 53 cents from $7.70 to $8.23 over the last 30 days. Over the last 7 days, the estimate has been raised by 9 cents from $8.14.

For 2011, the estimate has been raised significantly by 90 cents from $8.06 to $8.96 over the last 30 days. Over the last 7 days, the estimate went up by 11 cents from $8.85 for the year. The estimate revisions looks promising as analysts continue to value the stock at an increasing premium.

Magna in Outperform Lane
Magna commands a strong competitive position in the industry, as it is one of the few providers of a complete range of interior and exterior auto systems to global auto companies. Increasing content per vehicle is the main driver of Magna’s growth.

We also appreciate the company’s continued focus on emerging markets, which contributed to a 62% increase in Rest of World (ROW) sales in the first nine months of 2010. Growth in ROW sales will benefit Magna, as much of the future growth in global vehicle production is expected to occur in emerging markets such as Russia and various countries in Eastern Europe and Asia.

These, along with the improved results and a strong outlook, have led Magna to maintain Zacks #2 Rank on its shares, which translates to a short-term (1–3 months) Buy recommendation. In line with this, we reiterate our Outperform recommendation on the stock for the long-term (more than 6 months).