Magna Shares Slump as U.K. Expansion Comes Amid Brexit Fallout

  • Stock on track for biggest two-day loss since August 2011
  • Slide provides buying opportunity, some analsyts say

Talk about bad timing for Magna International Inc.

Almost exactly one month after the Canadian auto-parts manufacturer announced it would build a 225,000 square-foot aluminum casting facility in Telford, U.K., Britain voted to leave the European Union.

While it’s not clear the vote will change plans for the plant, the expansion highlights the exposure the Aurora, Ontario-based company has in Europe and the uncertainty that now brings. A representative didn’t immediately return calls seeking comment.

Investors dumped the stock. Magna shares fell 6.1 percent to C$44.16 at 2:34 p.m. in Toronto, bringing losses to 14 percent since the U.K.’s shock vote on Thursday. That puts them on track for the biggest two-day decline since August 2011.

Magna, which currently employs about 2,500 people in England across manufacturing, assembly, engineering, product development and sales, earned $3.24 billion in revenue from Europe in the first quarter -- about 36 percent of total sales, according to data compiled by Bloomberg. The new plant, which will support Tata Motors Ltd.’s Jaguar Land Rover and is set to begin production in 2018, will create 295 jobs. It received financial support from the U.K. government, according to a May 25 statement.

Compelling Value

The drop in the shares makes them compelling, according to some analysts.

“They’ve been hit here a little harder due to their European exposure, but that just makes them a very attractive opportunity from a valuation perspective,” Jeff Windau, an analyst at Edward Jones & Co. covering Magna, said in a phone interview from St. Louis. He holds a buy rating for the stock. “We haven’t seen these levels since the financial crisis. We like the story and it’s attractive for long-term investors.”

The shares currently trade at 6.4 times 12-month forward earnings based on Bloomberg estimates, compared with the 9.3 times average in the Bloomberg Intelligence Global Auto Parts Valuation Peers Index, the data show.

Dual-clutch Transmissions

While Magna also has a big footprint in Germany, sealing a 1.75 billion euro ($1.93 billion) deal for auto-transmission supplier Getrag Group in January, the new acquisition specializes in dual-clutch transmissions needed in more fuel-efficient vehicles in growing markets such as China, Windau said.

Richard Hilgert, a Chicago-based equity analyst with Morningstar Inc., said investors have overreacted in their selloff of Magna. He estimates the stock should be trading at C$58 a share in Toronto, more than 30 percent upside from current prices.

Magna has 12 buys, five holds and zero sells among analysts covering the company, according to data compiled by Bloomberg. The 12-month consensus target price for the stock is C$70.73, implying an even higher upside of about 60 percent.

“Magna is undervalued,” he said. “Brexit will take several months before all of this gets done, and over that time frame companies will be able to adjust some of the economic concerns that are out there. Car demand will hold up fairly well while all of the issues in Britain’s exit and all the negotiating takes place.”

In countries like Germany and the U.K., businesses drive a lot of light-vehicle demand as they often provide employees with a company car as part of their compensation, a tradition Hilgert expects will continue.

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