Company Reports

Magna’s second-quarter results and negative outlook revisions for 2024 and 2026 sent the stock down 6% on Aug. 2. We are reducing our US dollar fair value estimate to $64 from $71 and our Canada fair value estimate to CAD 89 from CAD 97 based on the lower outlook. Despite the bad news in the quarter, we think Magna’s stock remains a good bargain for long-term investors willing to wait out the negative sentiment often surrounding auto suppliers. We also expect the company to announce a share buyback late this year or in early 2025 that could lift the share price.

Magna International is one of the largest and most diversified auto parts suppliers in the world but that size is no guarantee of economic profit. While breadth in product and services can be advantageous regarding cross-selling—commercial activities that bolster content per vehicle and market penetration—we don’t see margins getting high enough to merit moat worthy return on invested capital due to numerous competitors in Magna’s largest segments. The company enjoys customer switching costs, which are common to auto suppliers with moats, but its financial performance does not quite merit one.

Magna International is one of the largest and most diversified auto parts suppliers in the world but that size is no guarantee of economic profit. While breadth in product and services can be advantageous regarding cross-selling—commercial activities that bolster content per vehicle and market penetration—we don’t see margins getting high enough to merit moat worthy return on invested capital due to numerous competitors in Magna’s largest segments. The company enjoys customer switching costs, which are common to auto suppliers with moats, but its financial performance does not quite merit one.

Magna’s first-quarter results included adjusted diluted earnings per share falling 6.1% year over year to $1.08, while adjusted EBIT, including equity income, rose 4.5% to $469 million. Pretax income, however, fell 2.6% on higher interest expense. Like some other suppliers in our coverage, Magna is seeing customers slowing launch volumes, and it has taken a $400 million hit to projected full-year revenue on the assumption of no further Fisker Ocean production in the Steyr complete assembly segment. We think that assumption is prudent, given Fisker’s distress.

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of economic profits for investors. While breadth in product and services can be advantageous with regard to cross-selling--commercial activities that bolster content per vehicle and market penetration--we see only limited evidence that Magna's diversified strategy has benefited investors in the form of higher margins and ROIC.

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of economic profits for investors. While breadth in product and services can be advantageous with regard to cross-selling--commercial activities that bolster content per vehicle and market penetration--we see only limited evidence that Magna's diversified strategy has benefited investors in the form of higher margins and ROIC.

No-moat-rated Magna reported fourth-quarter earnings per share before special items of $1.33, missing the $1.46 FactSet consensus by $0.13 but up $0.39 from $0.94 reported a year ago. Higher customer volumes on less supply chain disruption were partly offset by UAW strikes, increased engineering spending, and inflationary cost pressures. Revenue rose 9% to $10.5 billion, up from $9.6 billion in the prior year due to increased volume, new business backlog, and the Veoneer acquisition. The top line narrowly beat consensus by $13 million. Organic revenue increased 4%, 2 percentage points below a 6% increase in global production weighted to Magna's customer base, mainly due to the strike.

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of economic profits for investors. While breadth in product and services can be advantageous with regard to cross-selling--commercial activities that bolster content per vehicle and market penetration--we see only limited evidence that Magna's diversified strategy has benefited investors in the form of higher margins and ROIC.

No-moat-rated Magna reported third-quarter earnings per share before special items of $1.46, beating the $1.33 FactSet consensus by $0.13 and up $0.36 from the $1.10 result reported last year. Higher customer volumes on less supply chain disruption and better throughput were partially offset by customers’ UAW strike, increased engineering spending, and inflationary cost pressures. Revenue jumped 15% to $10.7 billion, up from $9.3 billion in the prior year on customer volume, new business backlog, the Veoneer acquisition, and customer cost recoveries. The top line beat consensus by 3%. Organic revenue increased 10%, 2 percentage points better than an 8% increase in global production weighted to Magna's customer base.

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of economic profits for investors. While breadth in product and services can be advantageous with regard to cross-selling--commercial activities that bolster content per vehicle and market penetration--we see only limited evidence that Magna's diversified strategy has benefited investors in the form of higher margins and ROIC.

No-moat-rated Magna highlighted revenue growth from powertrain electrification, battery enclosures, and advanced driver assistance systems (which includes the acquisition of Veoneer), or ADAS. The firm expects revenue, including joint ventures, from these product areas to grow at around an 87% annualized rate from slightly less than $1.0 billion in 2022 (excluding Veoneer) to $6.0 billion-$6.5 billion in 2025. Because of the big backlog of new business, management targets research and development in these product areas to fall from 110% of revenue in 2022 to just under 20% in 2025.

No-moat-rated Magna reported second-quarter earnings per share before special items of $1.50, beating the $1.23 FactSet consensus by $0.27 and up $0.67 from the $0.83 result reported last year. Higher customer volumes on less chip crunch impact and better throughput were partially offset by higher launch costs, increased engineering spending, and continued industry headwinds including the chip shortage, logistics disruption, inflationary cost pressures, rising interest rates, and possible recession in major auto markets. Revenue jumped 17% to $11.0 billion, up from $9.4 billion in the prior year on customer volume, new business backlog, the Veoneer acquisition, and customer cost recoveries. The top line beat consensus by 5%. Organic revenue also increased 17%, outperforming a 14% increase in global production, weighted to Magna's customer base, by 3 percentage points.

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of economic profits for investors. While breadth in product and services can be advantageous with regard to cross-selling--commercial activities that bolster content per vehicle and market penetration--we see only limited evidence that Magna's diversified strategy has benefited investors in the form of higher margins and ROIC.

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of economic profits for investors. While breadth in product and services can be advantageous with regard to cross-selling--commercial activities that bolster content per vehicle and market penetration--we see only limited evidence that Magna's diversified strategy has benefited investors in the form of higher margins and ROIC.

No-moat-rated Magna reported first-quarter earnings per share before special items of $1.11, $0.24 better than the FactSet consensus estimate of $0.87 but $0.17 below the $1.28 result reported last year. Despite less chip crunch impact, the shortfall was attributable to headwinds including continued but improving chip-related production shutdowns, higher warranty accrual, operational problems in a European facility, higher launch costs, and inflationary cost pressures. Revenue rose 11% to $10.7 billion from $9.6 billion in the prior year as customer call-offs continued but lessened and due to new business backlog. The top line beat consensus by 7%. Organic revenue increased 15%, outperforming a 7% increase in global production, weighted to Magna's customer base, by 8 percentage points.

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of economic profits for investors. While breadth in product and services can be advantageous with regard to cross-selling--commercial activities that bolster content per vehicle and market penetration--we see only limited evidence that Magna's diversified strategy has benefited investors in the form of higher margins and ROIC.

No-moat-rated Magna reported fourth-quarter earnings per share before special items of $0.91, $0.12 under the FactSet consensus estimate of $1.03 and $0.39 below the $1.30 result reported last year. Despite less chip crunch impact, the shortfall was attributable to headwinds, including continued chip-related production shutdowns, higher warranty expense, operational problems in a European facility, higher energy costs, China COVID-19 resurgence, and inflationary cost pressures. Revenue increased 5% to $9.6 billion from $9.1 billion in the prior year as customer call-offs continued but lessened and due to raw material cost recoveries. The top line was nearly flat with the consensus. Organic revenue, excluding currency, increased 13%, outperforming a 5% increase in global production, weighted to Magna’s customer base, by 8% points.

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of better returns for investors. While breadth in product and services can be advantageous with regard to cross-selling--commercial activities that bolster content per vehicle and market penetration--we see only limited evidence that Magna's diversified strategy has benefited investors in the form of higher margins and returns on invested capital.

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of better returns for investors. While breadth in product and services can be advantageous with regard to cross-selling--commercial activities that bolster content per vehicle and market penetration--we see only limited evidence that Magna's diversified strategy has benefited investors in the form of higher margins and returns on invested capital.

No-moat-rated Magna has agreed to acquire the active safety (advanced driver assistance systems, or ADAS) business of Veoneer from private equity firm SSW Partners, in a $1.525 billion deal. Including customary regulatory and closing conditions, management expects the deal to close around mid-2023. While it is possible that another bidder might emerge, we think it is unlikely as management stated SSW Partners went through a bidding process. Nor do we see any difficulties in getting regulatory approval because, even though there is some customer and technology overlap, there are still several global Tier I ADAS competitors (besides Magna and Veoneer, at least six by our count) and the acquisition would not place the combined group in a vastly superior market position.