Magna's EPS Estimate Lowered Due to American Axle Strike

Citigroup Global Markets analyst Itay Michaeli has lowered her earnings per share estimate and price target for Magna International Inc. (MGA), saying the Ontario auto supplier will lose the profit on an estimated 100,000 vehicles because of an ongoing strike by workers at American Axle & Manufacturing Holdings Inc. (AXL).

The analyst cut her current year estimate to $6.85 from $7.02, and reduced her target price for Magna shares to $96 from $98. She rates the stock a buy with medium risk. “We see potential for volatility in the quarter” because of the strike impact, Ms. Michaeli said in a note to clients. General Motors Corp. (GM), a major Magna customer, has been forced to idle or slow production at almost 30 factories and lay off thousands of workers temporarily as the work stoppage drags into its seventh week. American Axle makes axles and parts for every GM light truck and SUV in North America.

Citigroup said its buy rating on Magna shares reflects Magna’s attractive equity valuation, solid growth prospects, net debt-free balance sheet, and robust free cash flow outlook. “Magna’s manufacturing and engineering capability, financial strength, and skilled management team should allow the company to grow and prosper despite industry turmoil,” Ms. Michaeli said.

Nevertheless, some people close to the company have raised concern about its new exposure to non-automotive business. Magna is being asked to guarantee a C$1-billion five-year term loan as part of a complex transaction to reorganize MI Developments Inc. (MIM) and Magna Entertainment Corp. (MECA). Magna would own 10% of a revamped MID under the deal.