Citigroup Analyst: Short Lear, Long Magna

Things were looking up slightly for the North American auto industry in recent weeks. Oil prices sank below $100 per barrel, and used vehicle prices were nudging back up. Automakers were idling plants to make sure they didn’t produce an oversupply of industry. But any optimism for a near-term recovery has vanished, according to Citigroup Global Markets analyst Itay Michaeli.

Mr. Michaeli wrote in a note:

Credit market turmoil, a weakening European outlook and strengthening U.S. dollar will likely weigh further on 2009 outlooks, overshadowing recent positive data points. In such a period of low visibility, we suggest pair positioning supplier stocks on relative value, while sticking with companies sporting sound liquidity, lower leverage and specific catalysts.

One suggested pair trade from the analyst: Going short on sell-rated Lear Corp. (LEA) and long on buy-rated Magna International Inc. (MGA). Not only is Magna attractively valued [2.5 times 2008E EV-to-EBITDA], it also has a strong balance sheet to weather the credit crisis and a track record of capturing business from weaker rivals, the analyst said.

Mr. Michaeli said:

Magna will also likely benefit more than Lear if Congress hands the U.S. auto industry $25-billion in low-rate loans next week as expected.

The analyst has a $70 target on Magna shares and a 2008 EPS estimate of C$5.69, down from C$5.89 previously.