Today I bring you a Canadian stock, selected by Roy Ward, our value investing expert and longtime editor of Cabot Benjamin Graham Value Investor.
It’s Magna International (MGA), with headquarters in Aurora, Ontario. Here’s what Roy wrote about the stock in his February issue.
“Magna International is an independent supplier of original equipment components, assemblies, modules and systems and related tooling for cars and light trucks. The company designs, develops and manufactures products for North American, European and Asian car and truck manufacturers. The world’s major automakers are progressively outsourcing complete vehicle systems to large parts makers. Magna’s vast size and capabilities are beating out smaller rivals, a trend that will likely continue in the future. The company is also actively acquiring companies that are immediately adding growth, profitability and earnings.
“For the 12 months ended 12/31/13, sales increased 12% and EPS climbed 18%. Cost control and better efficiency are producing bigger profits. Also, Magna is clearly taking market share from competitors at a time when car and truck sales are robust in North America. In addition, the company’s revamped European operations are producing better-than-expected results. I expect sales to increase 7% and EPS to rise 19% for the next 12 months ending 12/31/14.
“At 13.6 times current EPS and with a dividend yield of 1.5%, MGA shares are attractive. Magna’s balance sheet is strong with minimal debt. Buy MGA at the current price. I expect the stock to rise to my 102.24 Min Sell Price within one year.”
That was written in February, when the stock was trading at 87. It did climb to a high of 101 in early April, nearly reaching Roy’s goal, but by then Roy had raised his goal! Or I should say his model had raised his goal, because there’s no judgment in Roy’s analysis—everything is quantified; Roy enters the numbers and the computer spits out the target valuation.
So what should you do today, as the stock sits just under 100 and yielding 1.6%?
If you own it, hold on (even Citigroup recently upgraded the stock from Sell—a very rare rating for a brokerage—to Neutral).
And if you don’t own it?
Well, you could certainly jump on board here. The stock has held up very well through the market’s selling pressures in recent weeks, telling me it has strong institutional support.
But even wiser would be to take a trial subscription to Cabot Benjamin Graham Value Investor, so you can get Roy’s regular updates on the stock, and, most importantly, be advised of the new target price, so you know when to sell. Click here for more information.
Magna International (MGA): #6 in growth & value series
By Paul Goodwin, Editor of Cabot China & Emerging Markets Report
From Cabot Wealth Advisory 10/31/13 Sign up for free Cabot Wealth Advisory
My stock pick today, the sixth in my series of stocks that share both growth and value characteristics, is Magna International (MGA), an automotive parts company that was featured in Cabot Top Ten Trader on August 26, 2013.
Now, a stock’s appearance in Top Ten is not to be taken lightly. It means that out of the thousands of stocks in the entire market, that stock possesses the price appreciation, liquidity, sound fundamentals, appealing story and momentum to put it at the top of the growth universe.
So when a stock from Top Ten also appeals to the finely tuned value sensibilities of Roy Ward, the analyst behind Cabot Benjamin Graham Value Investor, I get intrigued.
I asked Roy to write an updated analysis of Magna International, and here’s what he supplied:
Magna International ‘A’ (MGA: 84.61) Max Buy Price is 72.06; Min Sell Price is 95.46
MGA, with headquarters in Aurora, Ontario, is an independent supplier of original equipment components, assemblies, modules and systems and related tooling for cars and light trucks. The company designs, develops and manufactures products for North American and European original equipment manufacturers.
The world’s major automakers are progressively outsourcing complete vehicle systems to large parts makers. Magna’s vast size and capabilities are winning market share from smaller rivals which will likely continue in the future. The company is also actively acquiring companies that are adding growth, profitability, and immediate earnings.
Second quarter sales increased 16% and EPS climbed 20%, easily beating my forecast. Magna is clearly taking market share from competitors at a time when car and truck sales are robust in North America. I expect sales to increase 6% and EPS to rise 16% for the next 12 months ending 9/30/14.
At 12.3 times forward EPS and with a dividend yield of 1.5%, MGA shares are attractive but somewhat overpriced. MGA’s balance sheet is strong with minimal debt. Hold. Written July 11, 2013. Updated October 16, 2013
Magna is now trading at around 84, which makes it a little overpriced to buy as a value stock. But it is still being followed on page 12 of Cabot Top Ten Trader, which means it’s still working as a growth stock.
Here’s what Mike Cintolo had to say about Magna International in the August 26 issue of Cabot Top Ten Trader.
Why the Strength: Magna International is riding the worldwide recovery in auto production. The company is a massive ($32.8 billion in annual revenue!) auto supplier, with more than 120,000 employees; its products include body, chassis, powertrain, closure, roof systems and much more. Thus, if the auto sector is ripping higher, Magna will do well, and that’s exactly what’s going on now. The firm’s second quarter report was another sparkler, with revenues up a solid 16% (compared to vehicle production gains for the industry of 7% in North America and -1% in Europe), and continued efficiency gains pushing earnings up 20%. And after the top brass indicated that the rest of the year looks good, analysts quickly hiked their earnings estimates (now $6.13 per share for this year, and $7.30 in 2014); that leaves the stock with a mild P/E ratio of 13 for this year, to go along with a decent 1.6% dividend yield. Clearly, Magna isn’t changing the world, but after years of sluggish sales, it’s possible the world economy accelerates and auto sales keep kiting higher, which will continue to boost Magna’s results. Investors are betting on it.
Technical Analysis: MGA has been in a beautiful, 45-degree uptrend during the past few months, cranking higher along its 25-day and 50-day moving averages. To be clear, the stock isn’t in the very early stages of its advance, however, this impressive upmove came after a 27-month consolidation, so we can’t say the end is necessarily nigh, either. The stock recently popped on earnings and has tightened up in recent days. Given its pattern, you could buy some shares here, but a dip toward the 25-day line (now at 78) would be a better entry.
Magna will report its third-quarter results before the market opens on November 6, which is next Wednesday. And the results will likely set the immediate direction for the stock’s price. But Roy Ward’s evaluation of Magna International as a value issue is a strong sign that MGA will eventually wind up in the mid-90s, where its fundamentals say it belongs.
By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 1/17/10 Sign up for free Cabot Wealth Advisory e-newsletter
Magna International ‘A’ (MGA) is headquartered in Aurora, Ontario. Magna designs and manufactures a diversified line of automotive components and vehicle systems for automakers throughout the world. The company is gaining significant market share because of its manufacturing flexibility, dependability and geographic reach.
Automotive manufacturers are opting to outsource part of their operations to a few large component and system makers like Magna rather than outsource to many small component makers. The outsourcing trend is helping the company to expand rapidly and garner a larger share of the market.
Sales likely increased 37% in 2010 and could increase another 12% in 2011. Earnings improved from a deficit of $1.34 per share to a profit of $4.20 per share in 2011 and another profit of $5.00 in 2011. At 14.6 times our 2011 EPS forecast, MGA shares are quite reasonably priced. The company recently raised its dividend, which now yields 1.2%.
J. Royden Ward
Chief Analyst, Cabot Benjamin Graham Value Investor
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Investor, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to the Value Investor.