(Editor’s Note: There is much greater liquidity on the TSE under the ticker LNR).
Fears that vehicle sales are cooling has created a compelling entry point for shares of Linamar Corp. (OTCPK:LIMAF), an auto parts manufacturer. Adding pressure to the stock is growing sales of electric cars, which require fewer parts.
At 4.3x EV/EBITDA and 6.5x EPS, the company is trading at a significant discount to its five-year average. We think the bear case for parts manufacturers is overblown and doesn't justify the depressed valuations. At current multiples, investors are also overlooking company initiatives that should result in an uptick in earnings next year.
LNR has used free cash flow to vertically integrate. In the past year, it purchased two casting companies allowing it to produce parts it previously bought in Europe and finished in house. Given management's history of achieving 20% return on invested capital over the past five-plus years, we believe the acquisition was prudent and will bolster the bottom line.
The company is also poised to benefit from a growing global trend of OEM outsourcing. In the U.S., about a third of parts production is handled by third-party manufacturers. In Japan, market penetration is much lower at 15-20%. Because of its small size, LNR has been able to position itself as a nimble partner for large automakers. The efforts have resulted in it landing a first ever contract worth $200 million from Honda Motorcars for manufacturing camshafts. We are optimistic this will be the first of many orders.
Finally, we are impressed with the long-tenured management team in place and its commitment as shareholders. With more than 30% of outstanding shares in the hands of executives, management's objectives should be aligned with those of shareholders.
The above-mentioned actions helped LNR boost earnings by almost 14% per share for the third quarter compared to the same period a year ago. This was on top of a tripling of net income over the past five years. We expect revenue to continue to grow by 10% in the year to come.
Disclosure: I am/we are long LNR CN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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