Magna International Inc.

Transcription

1 February 26, 2015 Magna International Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 07/09/2014 Current Price (02/25/15) $ Target Price $ Week High $ Week Low $84.60 One-Year Return (%) Beta 1.23 Average Daily Volume (sh) 674,694 Shares Outstanding (mil) 207 Market Capitalization ($mil) $22,772 Short Interest Ratio (days) 2.33 Institutional Ownership (%) 62 Insider Ownership (%) 5 Annual Cash Dividend $1.52 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 14.5 Earnings Per Share (%) 40.2 Dividend (%) 24.7 using TTM EPS 12.3 using 2015 Estimate 11.3 using 2016 Estimate 9.8 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page (MGA-NYSE) SUMMARY Magna International reported adjusted earnings per share of $2.52 for the fourth quarter of 2014, surpassing the Zacks Consensus Estimate of $2.24. Revenues went up 2.4% to $9.4 billion, surpassing the Zacks Consensus Estimate of $9 billion. The year-over-year increase came on the back of increased production sales in North America and Asia, and tooling, engineering and other sales, partially offset by Rest of World, complete vehicle assembly and European production sales. The company declared a 16% increase in quarterly dividend and two-for-one stock split of its common stock, thus enhancing shareholders value. However, dependence on a few customers and uncertainty in the European automotive industry are some headwinds. Thus, we are maintaining a Neutral recommendation on Magna International. Risk Level * Average, Type of Stock Large-Blend Industry Auto/Truck-Orig Zacks Industry Rank * 59 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,361 A 8,962 A 8,338 A 9,174 A 34,835 A ,961 A 9,464 A 8,820 A 9,396 A 36,641 A ,521 E 8,924 E 8,598 E 9,906 E 35,949 E ,448 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $1.59 A $1.78 A $1.53 A $2.33 A $7.23 A 2014 $1.85 A $2.37 A $2.22 A $2.52 A $8.93 A 2015 $2.18 E $2.50 E $2.29 E $2.73 E $9.70 E 2016 $11.25 E *Note: EPS in 2014 do not add up to annual figure due to rounding-off. Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 RECENT NEWS Magna International Tops Q4 Earnings; Revenues Rise Y/Y - Feb 26, 2015 Magna International reported adjusted earnings per share of $2.52 for the fourth quarter of 2014, surpassing the Zacks Consensus Estimate of $2.24. Also, earnings per share improved 8.2% from $2.33 in the fourth quarter of Revenues went up 2.4% year over year to $9.4 billion in the reported quarter, surpassing the Zacks Consensus Estimate of $9 billion. The year-over-year increase came on the back of increased production sales in North America and Asia, tooling, engineering and other sales, partially offset by Rest of World ( ROW ), complete vehicle assembly sales and European production sales. Meanwhile, vehicle production rose 5% to 4.23 million units in North America and 3% to 5.06 million units in Europe. Operating income increased 31.7% to $677 million in the reported quarter from $514 million in the year-ago quarter Performance Magna International s adjusted earnings increased 26% to $8.93 per share for full-year 2014 from $7.23 in 2013, exceeding the Zacks Consensus Estimate of $8.77. Revenues for full-year 2014 rose 5.2% to $36.6 billion from $34.8 billion in Revenues surpassed the Zacks Consensus Estimate of $36.4 billion. Segment Details Revenues from the External Production segment (comprising North America, Europe, Asia and ROW units) went up 1.9% year over year to $7.69 billion in the reported quarter. Sales in North America increased 8% to $4.7 billion, driven by product launches. Revenues from Europe declined 8% year over year to $2.4 billion in the fourth quarter due to lower production volumes, decrease in content on certain programs and a drop in U.S dollar sales. Revenues from Asia surged 13% to $451 million in the reported quarter. The improvement is attributable to increased production and benefits from new launches in China. Revenues from ROW decreased 10% to $169 million due to lower U.S. dollar sales and production volumes. Revenues at the Complete Vehicle Assembly segment totaled $721 million, down 9% from $788 million a year ago. Also, Assembly volumes declined 10% to 32,965 units. Revenues from the Tooling, Engineering & Other segment increased 17% to $986 million in the quarter under review. Financial Magna International had $1.25 billion in cash and cash equivalents as of Dec 31, 2014, compared with $1.55 billion as of Dec 31, The company had long-term debt of $995 million as of Dec 31, 2014, as against $332 million as of Dec 31, In 2014, Magna International s cash flow from operations increased to $2.79 billion from $2.57 billion a year ago. On the other hand, capital expenditures rose to $1.59 billion in the year from $1.17 million in Equity Research MGA Page 2

3 Stock Split The board of Magna International has approved a two-for-one stock split of its common stock. The stock split will be implemented as stock dividend. As a result, shareholders will receive one additional share of the company for each share they possess. The stock dividend will be paid on Mar 25, 2015, to shareholders on record as of Mar 11. Meanwhile, the company is not assigning any monetary value to the dividend. Dividend The company s board of directors declared a 16% increase in quarterly dividend to $0.44 per share. After the two-for-one stock split, the dividend will be $0.22 per share. The dividend is payable on Mar 27 to shareholders on record as of Mar 13, Outlook For full-year 2015, Magna International projects revenues for the External Production segment in the band of $28.2 $29.5 billion. Meanwhile, Complete Vehicle Assembly sales are projected in the range of $ billion. For 2015, total revenue of the company is expected between $33.1 billion and $34.8 billion. Operating margin is projected at around 7% with a tax rate of 25% to 26%, while capital expenditures are anticipated to be in the range of $1.4 $1.6 billion. Equity Research MGA Page 3

4 VALUATION Currently, shares of Magna International are trading at 11.3x our 2015 EPS estimate of $9.70. The company s current trailing 12-month earnings multiple is 12.3x, compared with the 18.6x average for the peer group and 18.5x for the S&P 500. Over the last five years, shares of Magna International have traded in the range of 7.4x to 70.3x trailing 12-month earnings. The stock is trading at a discount to the peer group and the S&P 500, based on forward earnings estimates. The for 2015 is at a 29.4% discount to the peer group. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the overall market. Our target price of $116.00, which is 12.0x our 2015 EPS estimate, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Magna International, Inc. (MGA) Industry Average S&P Denso Corp. (DNZOY) N/A Johnson Controls Inc. (JCI) Lear Corp. (LEA) TRW Automotive Holdings Corp. (TRW) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Magna International, Inc. (MGA) Industry Average S&P N/A 2.1 N/A Equity Research MGA Page 4

5 Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research MGA Page 5

6 OVERVIEW Magna International Inc., based in Aurora, Canada, is a leading manufacturer and supplier of automotive components. The company designs, develops and manufactures automotive systems, assemblies, modules and components, besides engineering and assembling complete vehicles, primarily for sale to original equipment manufacturers (OEMs) of cars and light trucks. The product portfolio includes automotive interior and exterior systems, seating systems, body and chassis systems, electronic systems, powertrain systems, and roof systems. Magna International has 312 manufacturing facilities and 83 product development, engineering and sales centers across 29 countries. With 130,000 employees, the company focuses on delivering superior value to customers. Magna International has three reportable segments: External Production Sales or EPS (83.5% of sales in the first nine months of 2014); Complete Vehicle Assembly (8.4%); and Tooling, Engineering, and Other (8.1%). The EPS segment covers four geographic regions: North America (50.2% of sales), Europe (26.6%), Asia (4.6%) and Rest of World or ROW (2.1%) primarily consisting of South America and Africa. BMW, Chrysler/Fiat, Daimler, Ford, General Motors and Volkswagen are among the company s major customers. REASONS TO BUY For full-year 2014, Magna International raised its revenue guidance for the External Production North America segment in the range of $17.9 $18.3 billion from the previous estimate of $17.6 $18.2 billion. Revenues from the Complete Vehicle Assembly division are projected in the range of $3.1 $3.3 billion, higher than the previous expectation of $3 $3.3 billion. For 2014, total revenue of the company is projected between $35.8 billion and $37 billion, compared to the previous estimate of $35.6 $37.3 billion. For 2016, Magna International expects total production sales to be $3.6 billion. This encouraging guidance is based on the assumption that light vehicle production volumes will climb to 17.7 million units in full-year 2016 in North America and approximately 20.9 million units in Europe. A 45% rise in sales is expected to be generated from North America, 25% from Europe and the remaining 30% from ROW. Increasing earnings at Magna International is boosting cash flow. In the first nine months of 2014, Magna International s cash flow from operations increased to $1.79 billion from $1.31 billion a year ago. The company s operating cash flow also improved to $2.57 billion in 2013 from $2.21 billion a year ago. The strong cash position of the company facilitates regular capital deployment. As a result, on Feb 28, 2014, the company declared a 19% increase in the quarterly dividend to $0.38 per share. The improved dividend reflects the company s strong operating performance. In the first nine months of 2014, Magna International repurchased shares worth $1.43 billion. The company also announced cancellation of 14.1 million shares under the normal course issuer bid in the first nine months of Subsequent to the end of third-quarter 2014, the company repurchased an additional 1.1 million shares for $98 million. As of Nov 5, 2014, the company had 2,354,563 shares remaining to be repurchased under the normal course issuer bid. In addition, the Board of Directors of Magna International has approved a new repurchase program of up to 20 million shares. This represents around 9.8% of the public float of shares. We believe that the company s strong financial position will help it expand and allow it to enhance shareholder value through significant share repurchase programs and dividend payouts. Magna International is well positioned to benefit from its leading position in the industry as well as its operational efficiency. The company is also poised to benefit from the recovery in the automotive Equity Research MGA Page 6

7 industry and its diverse product portfolio. Magna International s expansion strategy in emerging markets is expected to favor results. In Sep 2014, the company announced plans of building two new facilities in the Sanand region of Gujarat, India. The building of these facilities is part of the company s initiative to expand its global engineering and manufacturing footprint. The plants will also help the company enhance its operations in India with increased vehicle production. Magna International also announced plans to produce complete seat systems for leading automakers in one of these two new facilities. In the second facility, the company will manufacture body and chassis systems for various customers. In Apr 2014, the company s Powertrain operating unit announced the opening of a new manufacturing facility in Ramos Arizpe, Coahuila, Mexico by This will be the company s third facility in Ramos Arizpe. Magna International will be manufacturing all-wheel drive systems for Volkswagen s Audi branded vehicles in this facility. Magna International is expanding its business through acquisitions and collaborations. In Oct 2014, one of the company s subsidiaries acquired the Techform Group of Companies, which is an automotive supplier of hinges, door locking rods and other closure products. After completion of the transaction, Magna International acquired Techform's facilities located in Penetanguishene, Ontario; Portland, Tennessee; and Hefei, Anhui China. This acquisition is expected to complement the product portfolio and strengthen the company s global position along with providing future growth opportunities. In Sep 2014, Tata AutoComp Systems Limited and Magna International signed a 50/50 joint venture (JV) agreement, in which they will be providing seating systems to the Indian commercial vehicle industry. The JV will be focused on delivering innovative seating systems to commercial vehicle manufacturers and buses. On Jun 2014, Magna International designed a multimaterial lightweight vehicle (MMLV) concept in collaboration with Ford. This new manufacturing model utilizes advanced lightweight and high-strength materials to design vehicles which weigh 25% less than the present vehicles. These new materials also result in environmental benefits while improving fuel efficiency. Rigid emission-related regulations by the U.S. government are likely to boost demand for fuel-efficient components for cars and trucks, which will benefit Magna International. REASONS TO SELL For full-year 2014, Magna International decreased its revenue guidance for the External Production Sales segment to $29.8 $30.7 billion from $29.8 $31.1 billion. In Europe, revenue expectation was decreased to $9.7 $10 billion from $9.9 $10.3 billion. In Asia, revenues are expected in the band of $1.6 $1.7 billion, down from $1.6 $1.8 billion, and revenue expectations from ROW were decreased to $0.6 $0.7 billion from $0.7 $0.8 billion. Magna International is significantly dependent on six customers, namely General Motors, Fiat- Chrysler, BMW, Ford, Volkswagen and Daimler. Thus, reduced demand from any one of these companies could affect the company s revenues. Though the company is striving to diversify its revenue base, a shift from the major customers will affect profitability. Moreover, the company faces pricing pressure in the form of incremental annual price concession demands from OEMs. Any rise in raw material costs will pose considerable threat to auto parts and accessories manufacturers, including Magna International. Price of resins and steel is exposed to considerable volatility and the company cannot shift the cost burden to the customers. Rising raw material costs lead to margin contraction. Equity Research MGA Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of MGA. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 8.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Copy Editor Content Ed. Lead Analyst QCA Reason for Update Kamalika Sinha Sweta Goenka Anindya Barman Analyst Note Equity Research MGA Page 8