Are Magna and BorgWarner Resistant to the Auto Industry's Recession Woes?

With a mild U.S. economic contraction underway and credit markets still shaky, Citigroup Global Markets analyst Itay Michaeli has crunched the numbers again for auto suppliers in a scenario where auto sales tank badly, and found that Magna International Inc. (MGA) and BorgWarner Inc. (BWA) are the most recession-resistant suppliers when it comes to earnings and balance sheet strength.

On the flipside, American Axle & Manufacturing Holdings Inc.(AXL), Goodyear Tire & Rubber Co. (GT), Lear Corp. (LEA) and Tenneco Inc. (TEN) show the most earnings volatility in a weaker sales environment, the analyst said in research note Monday.

Mr. Michaeli said:

Surprisingly, the best positioned companies' stocks have experienced similar declines to the group since last October (down 19% versus the group's 22%), suggesting that these high quality companies have not received full credit for their recession-resistance.

Most industry players are expecting U.S. new vehicle sales this year to come in at about 15.5 million units. But in a situation where they fall much harder, say to 13.4 million units, representing a peak-to-trough decline of 23%, the analyst estimates Magna's 2008 EBITDA would still stand up better than its peers on average, hitting $1.74-billion, or $6.18 per share. In a best case scenario of 15.8 million vehicles sold, the company's EBITDA would be $2.03-billion or $7.90 per share.

Magna has a low debt level and a net cash balance of C$1.9-billion as of Sept. 30, 2007. It is working to diversify its operations to counter output declines by the Detroit automakers.