You know the old saying, "If you can't say something nice, don't say anything at all?" Yeah, that's apparently a purely American gem -- and Canada's Magna (NYSE:MGA) isn't familiar with the advice. Yesterday, in one of the longest earnings releases you'll read this side of the Hudson, the auto parts maker had hardly a word to say that could qualify as "good."
Oh, I'll grant you that the company's $6.4 billion in sales looked pretty good, both in comparison to the $5.9 billion booked last year, and the analyst estimates calling for the same $5.9 billion yesterday. But the bigger-than-expected boost in sales didn't translate into even the $1.99 in profits per diluted share that Wall Street was looking for. On the contrary, the firm netted just $1.75 per share -- meaning that Magna's net margin tumbled 84 basis points year over year, to just 3%.
As for how the firm managed to snare all those extra sales, well, obviously eating higher raw materials costs rather than passing them on to customers, and accepting the resulting lower margins was part of the equation. But that also translated into improved market share, as its auto parts rose to comprise 12% of the makeup of the average vehicle sold in North America, up from last year's 10%.
Reading between the lines of Magna's description of trends in the auto industry, this Fool sees little reason to expect that Magna will quickly bounce back from the depressed margins it accepted in Q2 2006. The company noted that vehicle production in North America was stagnant at 4.1 million units; over in Europe, production declined 1% to 4.2 million units. (By the way, auto industry investors might want to carefully parse those statements. Magna didn't say that Ford (NYSE:F), DaimlerChrysler (NYSE:DCX), and GM (NYSE:GM) production held steady year over year -- just that overall unit production was flat. That overall "flat" production might well include valleys among the American automakers, helpfully filled in by increased production at the U.S. factories run by Nissan (NASDAQ:NSANY), Toyota (NYSE:TM), and Honda (NYSE:HMC).)
In other words, yes, Magna's sales grew strongly. And yes, it gained market share this quarter. But the market for its products (i.e., new cars being built) isn't growing, and to get the market share it got, the company had to accept lower margins. That suggests to me that barring a quick turnaround in new car-buying -- which I think the last few years of 0% financing makes unlikely -- Magna faces two choices. It can either raise prices to recoup its higher raw materials costs, and lose market share. Or it can continue to eat its higher raw materials costs, maintain or grow market share in reward for this cooperation, and accept lower margins.
Neither option seems likely to reward investors.
What's one (admittedly far-fetched) recipe for a turnaround in the auto-making world? Read all about it in What America Needs .
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Fool contributor Rich Smith does not own shares of any company named above.
