UBS Analyst Lowers Magna Target Price on Auto Industry Concerns

Analyst Fadi Chamoun at UBS Investment Research has cut his price target and earnings estimates for Magna International Inc. (MGA), saying North America’s largest auto supplier will feel the pain of a drop in demand for new vehicles in the United States through 2010.

The analyst reduced his 12-month price target on Magna shares to $77 from $103. He lowered the 2008 EPS forecast to C$5.89 from C$6.92, and also cut 2009 and 2010 EPS forecasts. His “buy” rating on the shares is unchanged. Magna stock is now trading under C$58.

In a note on Friday Mr. Chamoun said:

Valuation of Magna shares has fallen at a rate exceeding what would be justified by deteriorating fundamentals.

While we don’t foresee any meaningful positive catalyst for a quick turnaround in fundamentals, we believe that the shares offer good value for investors who can stomach the near-term volatility.

He added that the stock has fully discounted the possibility of a bankruptcy protection filing by Chrysler LLC, one of Magna’s top three customers.

Still, Mr. Chamoun argues that Magna’s robust backlog and cost saving possibilities should help cushion earnings from rising material costs and other pressures. The analyst projects that Magna would still generate C$440-million of free cash flow and earn 10.5% return on capital after tax in 2008.