The automotive industry continues to gain traction.
Last year, 68.8 million cars rolled off lots around the world, according to a December report from Bank of Nova Scotia (NYSE: BNS). In 2014, Scotiabank sees that total rising 5.2%, to 72.4 million.
North America accounted for 26.7% of all cars sold in 2013, a figure that is forecast to decline to 26.1% in 2014, as more buyers in emerging markets, particularly Asia, take to the highways.
Investors should watch for those two trends—continued growth and the shift toward emerging markets—to accelerate in the years leading up to 2020, according to an August report from McKinsey & Company. By then, the consulting firm sees emerging markets accounting for 60% of global car sales, up from 50% in 2012.
A Winning Buy Call
There are lots of ways for investors to hitch a ride, the most obvious being shares of carmakers themselves, such as General Motors (NYSE: GM), Ford (NYSE: F), Toyota (NYSE: TM) and Honda (NYSE: HMC).
Another option? Component suppliers like Canada’s Magna International (NYSE: MGA, TSX: MG).
David Dittman, chief investment strategist of our Canadian Edge advisory, issued a buy call on the stock in a July 5 article, citing the company’s “strong financial profile, based on conservative policies and solid operating results in the aftermath of the Great Recession.”
Dittman also liked Magna’s long history of shareholder-friendliness, including frequent dividend hikes since 2008 and regular share buybacks: in 2013, it repurchased 14.1 million shares for a total of $ 1.02 billion. It’s now working through a 12-million-share authorization that expires in November.
It turned out to be an astute call: in the eight months since Dittman’s article came out, Magna shares have raced to a 32.3% gain, lapping the S&P 500, with a 16.0% rise.
A Look Under the Hood
Aurora, Ontario-based Magna traces its roots back to 1957, when founder Frank Stronach set up a one-man tool-and-die shop called Multimatic. That year, he rang up just $ 13,000 (Canadian) of sales. In 1960, the company won its first auto-parts contract, to produce sun-visor brackets for GM, and by 1968, its sales had risen $ 2.6 million U.S.
Today, Magna has grown into one of the world’s largest auto suppliers. It boasts a $ 21-billion market cap and has 316 manufacturing facilities and 84 product-development, engineering and sales centers in 29 countries.
The company serves the automobile industry in a number of ways, including designing and manufacturing systems, modules and components ranging from powertrains to chassis, fuel and battery systems, mirrors and electronics. It also assembles entire vehicles under contract.
Magna counts most major automakers as customers, including the Detroit Three and overseas firms like Honda, Toyota and Volkswagen (OTC: VLKAY). It is also moving into the electric car market, supplying the grille surround, rearview mirror and headliner for Tesla’s (NasdaqGS: TSLA) Model S, for example.
Growing Beyond North America
North America is still the company’s biggest market, accounting for 48.1% of its revenue from external production in 2013. However, management continues to work on increasing Magna’s presence beyond the continent.
In 2012, it bought Ixetic, a maker of transmission and engine pumps with operations in Germany, China and Bulgaria. Ixetic’s customers include BMW, Daimler, Volkswagen, Renault-Nissan and Toyota.
Last year, Magna’s Asian business posted the fastest sales growth of all of its business segments (up 35% over 2012). Asia still accounts for a low 4.0% of Magna’s revenue, but that’s up considerably from 3.35% in 2012.
At the same time, the company continues to cut its costs in Europe, where it expects to take a $ 75-million restructuring charge in 2014. However, that’s down from $ 89 million in 2012, mainly related to the closure of a facility in Belgium.
“We’re through the heavy lifting in Europe,” said CEO Don Walker in the company’s latest post-earnings conference call. “The feedback I’m getting from our customers is they want to grow with us. They want us to be competitive.”
Rising car production in North America and Europe helped fuel a 30.5% jump in Magna’s earnings in the fourth quarter, to $ 458 million. Per-share profits gained 36.2%, to $ 2.03, on a lower share count thanks to the company’s buybacks. That was well in front of the consensus forecast of $ 1.55. Sales jumped 14.2% to $ 9.17 billion.
Highlights included strong sales gains in Asia (up 29%), Europe (up 17%) and North America (up 13%). Sales in the company’s “Rest of the World” segment (mainly South America) fell 11%, mainly due to unfavorable exchange rates. Complete vehicle assembly sales gained 13%, while sales from tooling, engineering and other activities rose 16%.
The strong results prompted the company to hike its quarterly dividend by 19%, to $ 0.38 a share. The annual rate of $ 1.52 yields 1.59%.
Analysts continue to forecast speedy earnings growth ahead, with expected profits of $ 7.83 a share in 2014, rising to $ 9.14 in 2015. Despite its recent rise, the stock trades at just 12.1 times the 2014 estimate. That’s attractive compared to the S&P 500’s forward p/e ratio of 15.85 and competitor Johnson Controls (NYSE: JCI), at 12.8.
The auto business is cyclical and hotly competitive (Magna controls just 11.3% of the U.S. industry,according to Barron’s), both of which add risk. However, Magna can count on its strong balance sheet, with cash and equivalents of $ 1.55 billion, up from $ 1.52 billion a year ago, and just $ 102 million in long-term debt.
What’s more, the road ahead appears marked by further dividend hikes and buybacks: the company has stated that it aims to reduce its cash balance, both by returning it to shareholders and investing in the business.
David Dittman has been studying the Canadian market for over a decade. His conclusion? There’s no better place for spectacular dividend yields (payouts of up to 10% are as routine as maple syrup in the fall)—and darn good capital gains, too.
Right now, he’s keeping close tabs on 150 Canadian stocks and trusts—including Magna—he sees as suitable for investors like you. You can get his latest advice on all of them when you take a no-risk 90-day trial to Canadian Edge today. Don’t miss your chance to join the happy band of Americans who’ve been piling up profits north of the border. Click here to get started now.
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