Auto Sales Drive Profits At Magna

| About: Magna International (MGA)

As automakers continued to post solid U.S. sales growth in March, Detroit's darkest days appear to be behind it. An increasing appetite for autos is keeping dealer inventory in check, which supports production growth and offers upside for diversified auto parts suppliers such as Magna (MGA).

A flurry of new, mileage-conscious options helped total U.S. light vehicle sales climb 8.7% last month, led by a 12.2% jump in cars. General Motors (GM) was a winner, with sales climbing 12%. But Chrysler sales saw the biggest bump, climbing 34%, which was far better than Ford's (F) 5% gain. Toyota (TM), which saw sales climb 15%, outpaced Honda (HMC), which saw sales drop.

Big parts plays are relatively automaker agnostic.

Given that car building remains a highly competitive industry, investors should consider focusing on diversified auto parts stocks instead of the automakers themselves. Those like Magna, which supply to most major producers, provide investors with the greatest industry exposure without the worry over which builder gains ground or slips up in any given month.

Magna is arguably one of the biggest auto parts plays, with a market cap of more than $11 billion and a foothold in just about every major auto maker. Given U.S. vehicle days of inventory fell to 55 in March from 59 in February, production growth should remain strong heading into summer.

While sales are growing in the U.S., overseas offers opportunity as well.

Overall, Q4 sales increased 13% to $7.3 billion as North American production sales rose 17% to $3.5 billion. The company was able to place more of its components in various vehicle programs and firm up pricing in some others. As a result, full-year sales came in 23% higher than 2010, reaching $28.7 billion.

Auto sales worldwide also offer Magna revenue opportunities. Last quarter, the company's rest-of-world production sales climbed 56% to $386 million. To meet the rising demand in emerging markets, the company continues to invest in capacity. For example, the company established two new joint ventures in China during the quarter, one for injected molded and painted parts, the other for body, chassis and structural assemblies.

Recession era cost controls offer shareholder-friendly dividend and buyback growth.

The auto industry is notoriously margin-unfriendly. But changes through the recession have provided better opportunities to leverage volume growth. At Magna, operating margins improved to 4.5% from 4% last year. And the company is guiding those margins up another 50 basis points in 2012.

The strength has allowed Magna to boost its dividend to $0.275 per share from $0.25, while also providing enough wiggle room to approve a 12 million share buyback, which equals 5% of its float. This buyback came on the heels of its recently completed 8 million share program.

Shares are currently trading 12% below their 52-week high, and earnings per share is expected to climb 15% in 2013 from 2012. This gives Magna a forward P/E ratio of 8.7, near the low end of its five-year P/E range. With a 2.4% yield and improving sales tied to worldwide auto production growth, investors also stand to benefit as short sellers, who are sitting on 6.5 days to cover/unwind positions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.