With the US auto market back in gear, opportunities abound for auto makers that are enjoying pent-up demand. However, this same recovery also benefits auto parts makers. In many cases, these companies have impressive histories of growing earnings, so they may be safer investments than traditional automobile stocks. In the industry, Magna International (MGA +1.19%) looks like a good choice due to its stable earnings performance and relatively low valuation.
Introducing Magna
Canada-based Magna is a large global automotive supplier that manufactures a wide range of parts, including seating systems, powertrain systems, engine electronics, structural components and driver controls. The company has some 315 manufacturing locations in 29 countries. The stock has a fairly large market cap of $17.61 billion, and it is up an impressive 77% over the last twelve months. Furthermore, it offers a 1.70% dividend yield at a very low 18% payout ratio.
Strong auto market fueling demand
US car sales are booming. For the first time since 2007, August monthly sales are expected to hit an annualized rate of 16 million vehicles. Companies like GM (GM 0.60%), a customer of Magna, are now preparing to ramp up production in response to this healthy demand . However, it is not only the US market that is growing. GM, once teetering on the brink of bankruptcy, expects to sell a record 5 million vehicles in 2013, partly as a result of strength in Middle-Eastern sales . GM's management is optimistic about the rest of the year, and expects strong performances in the US and China especially .
Magna has clearly capitalized on this trend. In its most recent quarterly report, the company delivered record results. Revenue of $8.96 billion was up 16% year-over-year, versus a 7% increase in North American vehicle production for the same period. Production sales, complete vehicle assembly sales, engineering and tooling sales all increased, across all regions . Somehow, the company achieved a 14% increase in European production sales, in a market that dipped 1%.
The company's updated outlook also says a lot about the state of the auto market. After expecting that 15.9 million light vehicles would be produced in North America in 2013 in its first quarter report, the company now expects around 16.1 million units to be produced. European production is expected to increase by a similar number of units. Magna's updated full-year sales guidance is now $33.3-$34.7 billion, versus previous guidance of $32.6-$34 billion. Furthermore, the company's operating margin is expected to rise from 5% to 5.8%.
Sales in comparison: Dana (DAN +1.43%)
Dana, based in the US, is one of the companies that competes with Magna. With a smaller $3.14 billion market cap, Dana is mainly involved in the production of driveline technologies such as axles and driveshafts. Despite the strength of the US auto market, the company hasn't been able to profit as much as Magna. Second quarter sales came in at $1.8 billion, down from $1.9 billion in the same period last year, partly due to scheduled light vehicle roll-offs and unfavorable currency effects. While Dana's net income increased 7% year-over-year, the company refined its guidance to the lower end of its previous guidance, largely due to economic pressures in India and South America.
Management now expects full-year sales of $7 billion, down from $7.1 billion. Still, the company has been doing a fairly good job in gaining business, scoring contracts with GM and Ford, among others . Aside from performing better than Dana, Magna is also valued more attractively at the moment.
Valuations and metrics
Magna is an inexpensive stock at the moment, trading at 12.07 times trailing earnings and 1.87 times book value. This is considerably cheaper than Dana's 16.53 times trailing earnings and 2.84 times book value. Magna has a pretty decent return on equity of 16.68% and an operating margin on par with the industry. Moreover, its balance sheet is in good shape, with $364 million in debt and $1.28 billion in cash.
The bottom line
With the US auto market in good shape, and solid sales figures for the year, things look pretty good for auto makers. However, things also look bright for auto parts companies as increased demand for vehicles will naturally lead to increased auto parts sales. Magna has been doing a great job increasing sales, even outpacing the industry. Additionally, Magna is trading at a discount to the market. As such, it looks like a good investment.
