Magna International: The Future Remains Promising
Summary
- Magna International is involved in the development of such promising tech as autonomous driving and EVs.
- The corporation continues to deliver strong results, evident by Q4 numbers.
- The revenue growth of Magna outpaces the broad auto industry. The guidance for 2018-2020 is positively updated.
- The company's valuation remains to be low. The current pullback provides an attractive opportunity to invest.
Autonomous driving and EVs should provide a substantial boost for the company
While the automotive industry is undergoing a significant transition, two main technologies are likely to be increasingly adopted by the companies involved in the field: autonomous driving (including advanced safety systems, or ADAS) and electric vehicles. The list of corporations that strive to get to leading positions in these two areas includes such tech giants as Intel (INTC) and Nvidia (NVDA), traditional automakers like General Motors (GM) and BMW (OTCPK:BMWYY), and newcomers such as Tesla (TSLA). I discussed the topic in several of my articles in detail, but I would especially recommend reading the following pieces for some specifics:
- Self-Driving Technology: 8 Tech Companies For Investment
- Magna International: A Significantly Undervalued Autonomous Driving Player
- Ford's New 'Electrifying' Strategy Is A Catalyst For Growth
- BMW: 100,000 EVs Is Just The Beginning
Magna International (NYSE:MGA) is another company in the auto segment that seems to be taking the trends seriously. The corporation has undertaken several steps over the last year to become a viable player in the markets for the aforementioned technologies. These ventures seem to provide confidence to the management over the future of the company, which will be discussed later in the article.
For instance, at the end of August last year, Magna unveiled its MAX4 platform for self driving based on multiple lidars, radars, and cameras. The company claimed the solution is ready for the SAE Level 4 (highly automated self-driving, which does not require human driver intervention). The article on Magna from the list above provides more details on the topic.
In October, Magna joined a group of companies, the BMW Group, Intel and Mobileye (MBLY), to "bring autonomous driving technology to market." It is claimed the mission of the alliance is to deliver a self-driving, flexible platform for vehicles by 2021.
Magna joins as a Tier 1 technology integrator and will help automakers industrialize and customize the domain controller designed by BMW Group, Intel and Mobileye.
As regards to EVs, the list of examples of how the company develops the segment is considerable. For instance, Magna has recently started the production of Jaguar's first all-electric model I-PACE in its facility in Austria. Moreover, the company's e1 concept for "etelligent" electrification was showcased during CES 2018, featuring "one highly integrated e-drive system on the front axle and one on the rear axle with two electric motors (e-motors)." In October 2017, Magna formed a joined venture with SAIC Motor subsidiary to expand its electrified powertrain lineup to China, the fastest-growing market for automotive corporations. The corporation claimed the JV would initially produce an electric-drive powertrain system for a German automaker.
As a result, the corporation seems to be ready for the changes that could happen in the auto industry. I believe Magna's efforts in the fields of EVs and autonomous driving set the company in a solid position in the industry, which is supported by the strong results for 2017 and encouraging guidance through 2020.
Q4 results confirm the strong position of Magna on the market. Revenue growth outpaces broad auto
On February 22, Magna reported its Q4 2017 results, beating on EPS by $0.01 and on revenue by $270 million. The revenue growth amounted to a hefty 12.3% year over year, which outpaced the growth rate of the auto market significantly, as European light vehicle production increased 7% and North American light vehicle production decreased 5% during the period. This allowed MGA's stock to outperform the First Trust NASDAQ Global Auto Index ETF (CARZ) in the last year.
The overall growth rate for 2017 is impressive, considering most automakers did not demonstrate stellar results for the year. A clear trend has also been established for Magna to beat analysts' expectations, which is a good sign for the corporation.
(Source: Seeking Alpha)
One of the most important points for such capital-intensive corporation as Magna is the increase in margins. And while Magna's business is associated with production that requires a high level of CAPEX, the company managed to grow its EBIT margin in Q4 from 7.5% to 7.8%, which is not a massive increase in itself, but the trend is significant. In combination with higher sales, due to a strong product portfolio, and favorable currency dynamics, the improvement in margins led to a 16% increase in EBIT. Importantly, EBIT acts as the primary basis for a valuation of a company, which is why Magna looks even more attractive now.
Net income attributable to Magna was $568 million, compared to $504 million in 2016, mainly reflecting higher EBIT partially offset by higher taxes. Diluted EPS grew 20% or $0.26 to $1.57 for the quarter, compared to $1.31 last year.
For the year, EBIT amounted to $3.1 billion, 38.5% of which was attributable to power and vision, confirming the fact that Magna is strongly positioned for the future of auto technology.
(Source: Earnings Call Slides)
When it comes to free cash flow, the situation also looks solid. Magna generated $585 million in free cash flow during Q4, bringing its 2017 amount to $1.2 billion, while also returning $461 million to shareholders in the quarter through dividends and buybacks. Notably, the buybacks amounted to around $1.3 billion in 2017, which continued the trend toward reducing the number of shares outstanding.
MGA Shares Outstanding data by YCharts
Strong guidance demonstrates the confidence of the management
In the middle of January, Magna's management provided an initial update for its 2018 guidance, raising its view on the future through 2020. The two main points that were highlighted by Seeking Alpha:
- The company expects sales of $39.3M to $41.5B in 2018 and sales of $42.7B to $45.7B in 2020.
- An EBIT margin of 7.9% is seen in 2018 and 8.5% to 8.9% in 2020.
The outlook for 2018 was also provided during the earnings call. It is seen the total sales are expected to continue growing in 2018 along with the margins, which will inevitably lead to the growth in cash flow. Therefore, it can be expected the corporation will continue its program of returning capital to shareholders through dividends and buybacks. Notably, the board has recently approved a 20% increase in quarterly dividends to $0.33 per share, bringing the current dividend yield to about 2.5%.
(Source: Earnings Call Slides)
The positive update confirms that the management is confident about the future of the corporation. It is likely the initiatives in such fields as power and vision, which include EVs, safety and autonomous driving, should be decent sources of revenue once the technologies gain full traction.
Magna remains to be significantly undervalued
In my previous article, I analyzed the company's valuation using the DCF model. Back then, the stock traded at about $45-48, while the fair value was estimated to be in the range of $66-75. The situation has not changed dramatically over last six months, although some positive updates have been provided by Magna's management, while also the number of shares has been reduced, potentially increasing the value per share.
I updated my model in light of full 2017 results and the management's guidance through 2020. The current assumptions are as follows:
1. The average annual revenue growth over the horizon period of five years is estimated to be around 5.1%:
- In 2018 and 2019, revenue will increase by 6.5% and 4%, respectively, which reflects the guided numbers.
- From 2020 to 2022, revenue growth will remain on the level of 5%. I find this scenario to be very conservative, especially if Magna is able to succeed in creating a viable self-driving platform and continues its electrification efforts.
2. EBITDA margin will increase from 11% shown in 2017 to 13% by the end of the horizon period, reaching the level of margin shown by such corporations as Delphi (DLPH).
3. The effective tax rate is estimated to remain at the level of 21-23% over the horizon period.
4. Then comes the WACC.
The after-tax cost of debt is 3.5%. The cost of equity capital (15.9%) is calculated using CAPM, with 1.44 beta, 2.9% risk-free rate, which is the current U.S. 10-year bond yield, and 9% market premium. The WACC is therefore estimated to be 14.2%.
As a result, the model shows $24.6 billion equity value under the base scenario, which assumes that EV/EBITDA multiple will stay on the level of 5 by the end of the horizon period (2022), which still would be much lower than this indicator of the peers. In this case, the fair value of the stock is $68.8. The sensitivity analysis shows a range of possible outcomes that will be driven by the actual results of the corporation. In light of this, the fair price range is $64-73.7, which again represents tremendous upside potential, although the rising bond yields offset some improvements in expected revenue and margins.
Magna is undervalued versus peers. The pullback provides an opportunity to invest
Overall, Magna International remains to be an attractive investment target. The company is well positioned for the future of the auto industry, as it should yield from its efforts in such trending technologies as vehicle electrification, safety and autonomous driving. The initial results already provide boosts for the corporation's performance, evident by strong 2017 numbers.
DCF analysis shows the current stock price is significantly lower than the fair value, which is likely to be even more critical in the future, as the share repurchases program continues. Moreover, Magna still looks undervalued versus peers, which demonstrates the stock has room to grow.
MGA EV to EBITDA (TTM) data by YCharts
The stock dynamics are well summarized by the citation from the recent earnings call:
We are currently trading at an EV to EBITDA discount to our peers. If you put a P/E multiple on our equity income, our EV to EBITDA multiple would be at an even greater discount to our peers. We are hoping that investors will begin to recognize this.
As a result, the current pullback to the level of $53 provides a solid opportunity to invest in the company. This is also reinforced by the technical approach, as major support line lies at the level of $52-53.
My detailed analyses of Magna, Nvidia, Intel, and other automotive and tech companies can be found on my profile page. If you like my article and would like to stay up to date on the next one, you can click the "Follow" button next to my profile.
This article was written by
Analyst’s Disclosure: I am/we are long MGA, BMWYY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (8)
The only thing is Tesla's cars probably require a different plant structure/setup which Magna may not have or willing to build. Would be interesting to know experts' opinion.