UBS: Magna Offers a Buying Opportunity

Shares of Magna International Inc. (MGA) offer the best buying opportunity in more than six years, UBS Investment Research analyst Fadi Chamoun argued in a report released on Monday.

Here are a few reasons why:

UBS estimates, using a discounted cash flow analysis that measures future free cash flow projections, that Magna shares have a market value of $157. But the company’s shares are trading in the range of $74.53, meaning the shares are trading at a discount of about 52%. While Magna stock has always traded at a deep discount to their DCF value because of the company’s mediocre corporate governance, Mr. Chamoun says the current discount is atypical and represents a good risk-reward. Magna had a net cash balance of $2-billion at the end of Sept.30.

UBS estimates Magna will generate $780-million in incremental revenues from parts provided to new vehicles launched in 2008 and ramp up from 2007 vehicle launches, including General Motors Corp.’s (GM) Chevrolet Malibu and Chrysler LLC’s (DCX) new Journey. That new revenue, plus improved profitability from a new labor deal expected in the first quarter with workers at its New Process Gear facility in Syracuse, will somewhat cushion the blow from a projected 9.3% decline in production this year from its big Detroit customers, UBS says.

The company is getting growing revenue contributions from emerging markets like eastern Europe, where it is planning a major push in coming years. UBS says the key risk to Magna this year is a full-blown U.S. recession, which would pummel vehicle sales.

UBS rates Magna “buy” with a 12-month price target of $110, down slightly from its previous target of $115.