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Why Magna International Shares Are Falling on Thursday

By Lou Whiteman - May 9, 2019 at 1:48PM

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The auto-part supply giant is lowering expectations for 2019.

What happened

Shares of Magna International (MGA -0.71%) fell more than 10% on Thursday after the Canadian auto part supplier missed on earnings and lowered its full-year profit forecast on high program costs and the impact of a slowdown in China.

So what

On Thursday, before markets opened, Magna said it earned $1.63 per share in the first quarter on revenue of $10.59 billion, falling short of analyst expectations for $1.71 per share in earnings on sales of $10.7 billion.

Total sales fell 2% year over year, which Magna noted compares well to total global light-vehicle production decreasing 7%. Reversing the impact of currency conversions and stripping out revenue from recent divestitures, revenue was up 3% from the first quarter of 2018.

Engineers examining an auto frame.

Image source: Magna International.

Unfortunately, Magna sees continued pressure on results in the quarters to come. The company said it now expects full-year net income to come in between $1.9 billion and $2.1 billion, down from earlier guidance for $2.1 billion to $2.3 billion in sales. Magna also expects total 2019 light-vehicle production of 16.7 million units in North America, down from its earlier forecast for 17 million units.

Company CEO Don Walker said in a statement that the combination of lower overall vehicle production, coupled with "margin pressure in our power & vision segment related to higher program engineering and other costs...and at a Getrag joint-venture in China due to lower than previously anticipated sales," would weigh on full-year results.

Now what

Magna has long been seen as a best-of-breed auto supplier, and the company's shares have more than tripled in value over the past 10 years. The company has a broad portfolio of business and a wide range of customers and has been aggressively moving into new areas including autonomous driving.

Walker said that despite the issues Magna is facing, "we remain confident in our ability to outpace production in our markets, generate strong free cash flow, and create value for our shareholders." In the meantime, Magna also offers a respectable 2.83% dividend yield.

As Magna notes, there are a lot of reasons to be nervous about the auto sector right now. But for those willing to ride out the cycle, there are few companies in the supply chain more attractive to own than Magna.

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