The other day while watching Jim Cramer on Mad Money I heard a lot of talk about the auto industry coming back and one company Cramer talked about was Magna International (NYSE:MGA). This sparked my interest so I decided to do some research and see just how good MGA really is.
|Cash / Share||5.63|
|Dividend (Yield)||1.00 (2.38%)|
|Price / Book||1.22|
|Earnings Growth (5 year projected)||9.25%|
|Debt / Equity||0.02|
P/E Ratio: In many cases a P/E ratio could be a good indicator of a company being over or undervalued, however, this is not one of those times. MGA has a P/E ratio of 11.16, which is very close to the industry average of 10.2 meaning MGA is about average.
PEG: Similar to P/E a lower PEG is generally desired. MGA has a PEG of 1.21, which is close to the industry average of around 1.14. Just as the P/E was around industry average, the PEG for MGA is also around the industry average.
Cash / Share: Here's where the good stuff starts to come into play. A cash per share ratio is essentially how much cash a company has sitting around per share of stock. In this case MGA has a cash / share of 5.63, which means that Magna has $5.63 of cash for every 1 share of stock. I searched around the news and it appears that MGA is going to expand some of its plants, such as a plant in Tennessee, as well as try to acquire several smaller auto parts companies in several countries including China. The cash per share ratio of $5.63 shows MGA has the cash to expand its operations without taking on a lot of debt.
Dividend: The dividend that is paid by MGA is one factor that really puts this company one step above the competition. Currently, MGA pays out a dividend of $1.00 per share every quarter. This is a 2.38% yield which is over double the industry average. When I invest, dividends are very important to me since I enjoy getting a few extra dollars every quarter. The argument can be made that MGA's dividend might be inconsistent or unstable since the dividend was not paid from Q2 of 2009 to Q2 of 2010.
However, I believe that one year of no dividends is irrelevant since the dividend was paid consistently, without missing any quarters, from 1992 to 2009. In fact, I believe cutting the dividend for one year was a good decision by management. It's better to cut a dividend and get the company back on its feet then keep the dividend and let it fall. Regardless the dividend has been paid consistently since it came back in 2010 and I don't see a reason for that to change any time soon.
Price / Book: The price per book ratio is important because this value shows how the actual stock price compares to the accounting, or book, price of the company. MGA has a P/B ratio of 1.22 which is pretty close to the ideal of around 1. When compared to the industry average of 2.3 MGA looks even better since the P/B ratio is about half of the industry average.
Earnings Growth (5 Year Projection): Perhaps one of the most important aspects to look at is the future earnings growth. Every investor's goal is to make money, which is hard if the company isn't increasing earnings. MGA has a projected 9.25% of growth over the next 5 years. Although 9.25% is not huge it's still growth and growth leads to more money, more profit, and better dividends all of which are good.
Debt / Equity: The reason I left this for last is that I feel this is one of the best factors of MGA. In this case MGA has a debt/equity ratio of 0.02, which means that for every $0.02 of debt there is $1 of equity. Essentially, MGA has almost no debt at all. This interested me to look further into the industry to see if no debt is the norm. I found that with a couple of MGA's competitors, such as Dan Holding Corp (NYSE:DAN), BorgWarner Inc (NYSE:BWA), and Visteon Corp (NYSE:VC), the average debt/equity ratio was around 0.50.
A low debt/equity ratio becomes a huge advantage over the competition when added to the large amount of cash MGA has. Since MGA is planning on expanding operations and acquiring smaller companies having room to pick up debt is a good thing. MGA can make better deals then many of the competitors since Magna has plenty of cash and room to increase their debt.
Conclusion: In this case the P/E and PEG ratios did not say much about how MGA stacks up against the competition. What really makes Magna International shine is the high dividend yield compared to the competition, the good amount of extra cash, and the ability to take on debt. In my opinion MGA is definitely a good long term investment, especially if the company acquires some good smaller companies and expands operations in an effective way.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.