Magna International: Slumping SUV and Pickup Sales Negatively Affect Earnings

RBC Capital Markets analyst Nick Morton has cut his valuation, earnings per share estimates for Magna International Inc. (MGA), arguing Canada’s biggest auto supplier will be hit by a potentially lengthy slump in U.S. SUV, and pickup sales as its largest customers drastically slash truck output.

He maintained his “outperform” rating on the shares, arguing it remains a good investment because it has C$18 a share of net cash and trades at a “very depressed” three times estimated 2008 EBITDA.

The analyst reduced his price target on Magna shares to C$92 from C$110 and scaled back his 2008 earnings per share estimate to C$6.27 from C$6.85. He also cut his 2009 earnings per share estimate to C$6.47 from C$7.83.

In a report, dated June 23, Mr. Morton wrote:

There is no doubt that Q2 results that are set to be released around August 7 will show the effect of reduced SUV and pickup production. The product is no longer in demand given high gas prices.

Mr. Morton estimated that Magna’s gross margin in the second quarter would be 13.5% compared to 14.4% in Q2 2007.

According to Mr. Morton:

Magna is unlikely to escape unscathed the retrenchment in the auto market. This is a cyclical industry and the best entry point is at or near the bottom of the cycle. We believe we may be that point now.

Late Tuesday morning, Magna shares were trading down C$0.62 to C$65.30 .