Apple's purported attempt to disrupt the automotive industry holds out the promise of a torrent of fresh revenue for the company and its suppliers. Considering what we know, Apple's likely automotive entry turns its possible partners into intriguing potential buys ahead of Project Titan becoming a reality -- particularly Magna International (NYSE:MGA).
Apple's coming assembly partner?
Contract assembly remains far more the exception than the norm across the automotive industry, and that's where Magna comes in for Apple's Project Titan.
The global supply chain of automotive-parts manufacturers remains diverse and somewhat fragmented, much like the smartphone component space. However, when it gets down to assembling an automobile into a finished product, almost all of the world's largest carmakers own and operate their own assembly plants -- leaving Apple in need of a partner to help bring Project Titan to market.
Though owning their own plants provides certain advantages for automakers, it also requires massive capital investments. With slightly more than $162 billion in net cash and investments on its balance sheet, Apple could easily pay for its own plant, but it would probably also crimp margins and return on capital to an unpalatable degree.
That's where Magna International comes in, as one of the only companies to offer contract auto-manufacturing services. Many sources have cited Magna's Streyr unit as the most likely place for Apple to turn to. In fact, Magna Steyr's potential to work with tech companies like Apple prompted on Morgan Stanley analyst to describe the firm as a possible "Foxconn of cars" in a note to investors last May, a tag many in the industry throw around in relation to Steyr. If Project Titan takes off and leads to Apple cars, and if Magna is the chosen manufacturer, ramping up would require Magna to undertake a massive expansion of its assembly scale, but Apple could finance it. If a relationship happens here, Magna's undervalued stock becomes all the more intriguing today.
A deal today?
Magna appears undervalued on both a relative and absolute basis, as its trading multiples reveal. See for yourself.
P/LTM Normalized EPS
For context, the S&P 500 currently trades at a price-to-earnings ratio of slightly more than 25.
Of course, any discussion of a company's valuation needs to incorporate its business outlook, and Magna's relatively constrained valuation implies some serious headwinds. However, a quick scan of its business shows that the outlook appears pretty favorable, relative to its seemingly gloomy valuation.
It's risky to bet on a stock based on what might happen in the future, but Magna isn't solely a play on what might happen with Apple.
What Does Magna Do?
Magna International is one of the largest manufacturers of modular auto parts in the world. Per its 10-K filing, Magna's core competencies include "producing body, chassis, exterior, seating, powertrain, electronic, vision, closure and roof systems and modules, as well as complete vehicle engineering and contract manufacturing" to the global auto industry .
The company generates over 50% of its revenue from providing the above components to auto giants Ford, General Motors, and Fiat Chrysler, making any potential assembly with a would-be competitor like Apple a difficult balancing act for the company. Fully assembling complete automobiles represents less than 10% of Magna's total sales, though reports have already linked Apple and Magna's Steyr unit to discussions presumably tied to Project Titan .
Equally interesting, Magna has repeatedly demonstrated an interest in moving deeper into full-fledged automobile manufacturing, though it has been met with resistance from its powerful automaker customers. A tech company like Apple seems like an ideal fit for a company with Magna's demonstrated ambitions. However, even outside of its upside potential with electric vehicles, even the near-term outlook for Magna appears far rosier than its depressed multiples would have you think.
Among the 17 sell-side research analysts covering Magna International stock, their estimates are all varying degrees of bullish. For its current fiscal year, the average of their estimates calls for a sales increase 12.3% to $36.1 billion, and even the lowest estimate calls for the company's sales to grow just over 10% year over year. The same goes for Magna's bottom line, though to a lesser degree. Here, analysts expect Magna's earnings per share to grow slightly more than 4%, and not a single analyst forecasts an EPS decline for the company.
Either way, given the apparently healthy outlook for its business, Magna's compressed valuation metrics don't make a lot of sense, and that doesn't even factor in potential meaningful catalysts -- such as Apple's Project Titan -- that could come on line in the medium or longer term.
Investors may be concerned that U.S. auto sales might not live up to their record-setting 2015, but if so, analysts' estimates aren't reflecting it. Aside from that potential headwind, Magna could be an interesting investment candidate, especially if its rumored role as a manufacturing partner for Apple comes to fruition.
Andrew Tonner owns shares of Apple and Ford. The Motley Fool owns shares of and recommends Apple and Ford. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.