Magna: The Best Deal in the Auto Parts Lot

Investors looking for a deal in auto industry stocks right now should park their money in Magna International Inc. (MGA), according to two Canadian-based analysts who see a buying opportunity in Frank Stronach’s auto parts company.

“In our opinion, [it’s] the best deal on the lot,” Nick Morton, RBC Capital Markets, said in a note to clients after Magna reported better-than-expected first quarter earnings of C$1.78 per share. Among the reasons cited by Mr. Morton are some familiar ones, including Magna’s strong balance sheet, substantial earnings stream in Euros, a growing footprint in emerging markets.

But here is one reason not so frequently heard - history. Mr. Morton said:

Looking at the past two recessions, Magna’s stock tended to decline prior to, and during, the economic weakness and rose in advance of the end of the recessions.

Following the downturn in the early 1990s, the company’s stock rose from a low of C$1.61 to a peak of C$45 in March 1994.

The same thing happened in 2001, when Magna shares tumbled to C$42 then recovered to C$66 over the next six months. This time around, Magna’s stock has fallen 18% from a high of C$96 last September. At 3.5 times 2008E EBITDA and one times book value, “this stock looks very attractive,” Mr. Morton said. Based on a discounted cash flow valuation, the analyst has a 12-month target on the stock of C$110.

Fadi Chamoun, who tracks Magna at UBS Investment Research, also thinks investors could ride Magna as the auto industry picks back up. He said:

Shares of Magna trade at 11.4 times PE on our 2008 forecast and 10 times on projected 2009. Excluding the company’s net cash per share of approximately $18 as of March 31, 2008, the shares are trading at 8.8 times on our 2008 earnings estimates and 7.7 times on 2009 estimates – the cheapest on record.

Mr. Chamoun rates Magna a “buy” with a 12-month target of $103.