Linamar Outpaces Magna in Canada Auto Recovery Race

Canada is home to the largest auto parts maker in North America and one of its smallest. So far this year, the promise of expansion is helping Linamar Corp. outperform Magna International Inc., a company 10 times its size in sales, as both warm to an auto sector recovery.

Linamar has outpaced Magna this year by 26 percentage points and investors are paying a 23 percent premium for the Guelph, Ontario-based company’s earnings over Magna, the highest since March 30, according to data compiled by Bloomberg. Linamar traded at a 49 percent discount to Magna, based in Aurora, Ontario, on Dec. 17, 2010.

“It reflects Linamar’s stronger growth potential,” David Tyerman, managing director of research at Canaccord Genuity Corp. in Toronto, said in an e-mailed response to questions. The company has a “very large new business backlog and rebounding non-auto business, especially Skyjack,” which makes telescopic forklifts and aerial work platforms, he said.

The automotive sector has shown a recovery this year after the predecessors of Chrysler Group LLC. and General Motors Co. were bailed out by the U.S. and Canadian governments in 2009. North American light-vehicle production rose 17 percent in the first quarter to 3.97 million units, according to researcher IHS Automotive. Toyota Motor Corp. said May 8 that deliveries will increase by 18 percent this year, led by North America where sales will climb 26 percent to 2.35 million autos.

Vehicle Mix

“In addition to rising production volumes in North America, Linamar should benefit from trends in vehicle mix” away from full size SUVs, Steve Arthur, an analyst at RBC Capital Markets in Toronto, wrote in a report yesterday.

Guelph, Ontario-based Linamar reported first quarter earnings May 9 of C$39.6 million ($39.4 million), or 61 cents per share, up from C$24.9 million during the same period last year. The adjusted EPS of 59 cents beat the average estimate of six analysts by 10 cents.

Revenue increased 24 percent to a record C$840 million from C$675 million because of higher U.S. demand for the engines and transmissions it makes for the major automakers, improved margins and new business gains in Europe. The company bought the Famer Group in France, a new plant in Germany and expanded sites in Mexico and Hungary, it said in a statement.

The company’s industrial division swung to profitability with a 113 percent gain in revenue to C$141 million because of fleet replacements and better margins, the company said.

“Recent signals point to continued growth in this segment,” Arthur wrote. The division should add C$25 million this year to earnings before interest, depreciation and amortization and C$43 million next year, he said.

Sales Growth

“Earnings growth is outpacing sales growth driving better margins, the industrial segment is solidly back into profit and all of that is driving great improvements” in return on capital employed and return on equity, Linamar Chief Executive Officer Linda Hazenfratz, who owns 5.8 percent of the company, said.

Justin Wu, an analyst based in Toronto at GMP Securities LP, said he was keeping a “buy” rating on the stock and raising his target price to C$27 from C$22. The shares rose 2.1 percent to close at C$21.32 in Toronto today. They have gained 52 percent this year.

“We continue to expect strong revenue and earnings growth driven by a substantial number of program launches, and a palpable cyclical recovery in its industrial segment,” Wu wrote.

Magna, which had sales of $28.7 billion last year compared with C$2.86 billion for Linamar, rose the most in two months yesterday after it reported that first-quarter profit gained 6.5 percent and it improved a full-year sales forecast.

Better Margins

Net income rose to $343 million, or $1.46 a share, from $322 million, or $1.30, a year earlier, Magna said.

“North American and European margins exceeded expectations” with the adjusted earnings per share of $1.46 “handily beating our $1.24 and consensus $1.31,” analyst Arthur wrote in a note yesterday.

Magna fell 1.7 percent to close at C$42.92 in Toronto. The shares are up 26 percent this year.

Revenue advanced by 6.6 percent to $7.67 billion. The average estimate of nine analysts was for sales of $7.49 billion, according to data compiled by Bloomberg.

Output Forecast

Magna, which operates about 269 plants in 25 countries, increased its North American production forecast to 14.4 million vehicles from 13.8 million vehicles in February and lowered volume expectations for Europe. Its annual sales forecast rose to as much as $30.5 billion from a Feb. 24 projection of as much as $29.5 billion.

Chief Executive Officer Don Walker said Magna is looking at “a number” of potential acquisitions. The company ended the quarter with $1.27 billion in cash.

While the company typically has made acquisitions of companies with $600 million in annual revenue, spending $200 million to $250 million, it is willing to spend much more, Walker told reporters yesterday after the annual meeting in Toronto.

“If we can get technology or gain business with a customer we want to grow with, we’ll certainly look at it,” Walker said. “There are a number we’re looking at right now.”

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