UBS Sees Buying Opprtunity In Cash Rich Magna

UBS Investment Research pushed up its price targets on Canadian auto suppliers Magna International Inc. (MGA) and Linamar Machine Ltd. (LNR/TSX) while holding steady to its bearish view of the auto sector overall, arguing Magna in particular is a buying opportunity because it has so much cash.

The investment house reiterated its “buy” rating on Magna and raised its price target to US$110 from US$103.

Analysts Fadi Chamoun and Rob Hinchcliffe noted Magna has historically resisted buying back its own shares or making any special distribution to its shareholders in excess of the 20% earnings payout ratio planned under the Magna constitution.

“We believe, however, that the likelihood of a higher distribution could be greater today than historically due to the unprecedented level of excess cash and growing free cash flow,” they wrote. “We believe Magna shares are a good investment due to the combined effect of low valuation and a growing cash balance, which is expected to exceed one-third of the company’s capitalization within a year.”

The analysts estimate Magna’s net cash balance will be higher than US$2.5-billion by the end of 2007 and grow to US$4-billion in 2008 if it doesn’t do anything with the cash stash. Magna reports third quarter results Tuesday.

The outlook for Linamar is a little less encouraging, the analysts said. That’s mostly because there are growing signs that demand for the company’s aerial work platforms is slowing.

At the same time, the Guelph, Ont.-based company will likely get walloped by the effects of a stronger dollar. Linamar could take a $30-million currency hit to its operating earnings when it reports Q3 results Wednesday, the UBS analysts said.

“We don’t believe that the company’s current valuation compensates for these risks and for the moderate return earned on its automotive business,” they said.

UBS has a “neutral” rating on Linamar, with a price target of C$24, up from C$21.

MGA 1-yr chart: