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One of my fears in the auto supplier trade (a big theme of 2010) was the impact of ever-rising prices in the "hear no inflation, see no inflation" world of Mr. Bernanke. I thought it might take a few more quarters to hit, but it appears the danger has already arrived as evidenced in Magna International's (NYSE:MGA) report last evening. This despite a very nice increase in content per car. MGA reported 88 cents vs. 94 cents' expectation and, with the run in the stock, very little room for disappointment. The stock is being pummeled today and has taken a lot of damage technically.

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These are the downfalls of companies that still have a heavy amount of costs in materials rather than mostly labor. Most of the other suppliers seem to have missed out on the issue this quarter, but I'd expect it to be a growing problem through 2011, as the pedal to the metal by the Fed continues ... although, as Bernanke tells us, his actions only make the stock market go up, not commodities. Ahem.

Via Reuters:

  • Magna International Inc. returned to a quarterly profit and hiked its dividend, but earnings fell short of expectations on higher input costs and as losses deepened at its electric car unit.
  • The world's No.3 auto parts maker forecast a flat operating margin of about 5 percent in 2011, as expected steeper prices for steel and resin, used in automotive finishes, and the costs of launching new facilities take the shine off higher anticipated sales.
  • "Given what's happening in the world today, and depending on what happens to oil prices, the headwinds on resins may increase as the year progresses," Magna Chief Financial Officer Vince Galifi said on a conference call.
  • Earlier Aurora, Ontario-based Magna reported net income of $216 million, or 88 cents a share, in the quarter ended Dec. 31. That was a turnaround from a loss of $139 million, or 62 cents a share, in the year-earlier period but below the 94 cents that analysts, on average, were expecting, according to Thomson Reuters I/B/E/S.
  • Sales were 22 percent higher at $6.6 billion as global vehicle production and sales continued to recover from a devastating auto sector downturn in 2009.
  • But losses at Magna's new E-Car Systems electric vehicle operations, which it owns together with Magna founder Frank Stronach, deepened to $37 million from $16 million as the venture invested in new technology and engineering. "It is a tough business because volumes are not huge yet," Magna Chief Executive Don Walker said.
  • The company generated cash from operations of $415 million in the fourth quarter, lifting its cash on hand to $2 billion at year-end.
  • Its average dollar content per vehicle rose 17 percent in North America and 6 percent in Europe from a year earlier. Both North American and European vehicle production increased 7 percent.
  • It repeated the sales forecast it made last month for 2011 and also said it expects to spend between $1 billion and $1.1 billion on fixed assets in 2011.

Disclosure: No position

Original article

Source: Magna International Fails on Earnings, As Input Costs Start to Hurt