Magna Squeezing More Profit From Mercedes Boom

Magna International Inc., North America’s top autoparts stock in the past six months, says it can squeeze more profit from Europe as it moves factories east to feed booming U.S. demand for German cars.

Magna foresees margins of 4 percent to 5 percent at its European operations in the next three to four years, from 1 percent last year, as it spends $100 million to shift manufacturing operations east, Chief Financial Officer Vince Galifi said.

“As our footprint continues to shift to the eastern part of Europe we’re anticipating continued improvement in operating margins,” Galifi said by phone on June 14 from Aurora, Ontario where the company is based.

Magna has been benefiting from partnerships with German automakers such as Daimler AG, maker of Mercedes-Benz, Bayerische Motoren Werke AG and Volkswagen AG. The carmakers are making inroads in the U.S. as auto sales post their best start to the year since 2007. U.S. sales may rise to 15.1 million this year from 14.5 million last year, according to the average estimate of 18 analysts surveyed by Bloomberg in January. Sales reached 16.1 million in 2007, according to data from Bloomberg Industries.

The auto rebound propelled Magna stock to a record yesterday, bringing gains in the past six months to 45 percent, the most among 15 North American autoparts stocks tracked by Bloomberg. The shares fell 0.5 percent to C$71.20 at 4:42 p.m. today, giving Magna a market value of C$16.6 billion ($16 billion).

Dividend Growth

The company’s price to earnings ratio of 12 is below the 14 North American Industry average. Twelve analysts recommend buying the stock, six say hold and three advise selling, with the average 12-month price target at C$73.42, according to analyst ratings compiled by Bloomberg. Magna is projected to boost its quarterly dividend to 35 Canadian cents in March, according to data compiled by Bloomberg.

“Our shareholders should expect the dividend -- with the cash generation we have -- that it’s going to continue to grow,” Galifi said.

Magna is looking at Hungary, Poland, Russia, Serbia and Turkey as possible sites for eight new manufacturing facilities in Eastern Europe while it adds only one in Western Europe and considers reducing operations in Germany and Belgium, with an eye to reducing labor costs, he said.

Shake Tree

The company currently has about one third of its European manufacturing operations in the eastern half of the continent, and it could incur more restructuring costs next year and the year after as it seeks to increase that percentage, he said.

“I think the fact they really took on this restructuring in their European operations will continue to bear fruit,” said Jeff Nelson, a St. Louis, Missouri-based analyst with Edward Jones & Co. who recommends buying the stock. “We were happy to see them really shake the tree in Europe and try to right-size their operations.”

The move comes as record joblessness caused by recession push European car sales to a 20-year low.

Registrations dropped 5.9 percent to 1.08 million vehicles in May from 1.15 million a year earlier, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said June 18. The figure was the lowest for the month since 1993.

“European production volumes have come down in the last few years, but when you look at our overall sales in Europe, our sales are actually up,” Galifi said. “A big part of it relates to our customer mix in Europe.”

U.S. Models

He credits domestic German auto sales along with German exports to the U.S. and China for the resiliency. Mercedes-Benz U.S. sales rose 10.2 percent in the year through May from the same period last year, according to researcher Autodata Corp. BMW sales have gained 8.2 percent in that same period and Volkswagen’s Audi sales have jumped 15 percent and have posted record sales for 29 straight months. Europe accounts for about 41 percent of Magna’s revenue.

A Magna factory in Graz, Austria assembles Daimler’s Mercedes-Benz G-Class sports utility vehicle which saw a 35 percent rise in sales last year, Sebastian Wahle, a spokesman for Daimler said yesterday in an e-mailed statement.

Magna will benefit from similarly favorable exposure to popular models from U.S. automakers, RBC Capital Markets analysts led by Joseph Spak said in a note dated June 11. RBC says Magna is an important supplier for models like the Chevy Silverado, GMC Sierra and Chevy Cruze, all of which will benefit from low inventory and strong demand.

“You don’t want to be on the car that’s 99 out of 100, you want to be on those kind of top platforms, those top tiers of what’s in demand today,” said Edward Jones’ Nelson. “They’ve done a good job of that.”

Construction Boost

Trucks are a particular area of opportunity for Magna as the contributions the company makes to General Motors’ K2XX truck platform, the basis for the Chevy Silverado, GMC Sierra, Chevy Tahoe, GMC Yukon and Chevrolet Suburban, have increased to $1,750 per vehicle from $1,500, Galifi said.

“As the residential construction industry continues to pick up in North America our view is that the requirement for utility type vehicles should increase,” Galifi said. “So our view is that is going to benefit us.”

Magna raised its 2013 sales expectations to a range of $32.6 billion to $34 billion when it reported first quarter results in May, compared with an earlier forecast of $32 billion to $33.4 billion in March. Magna now expects its operating margin will be in the mid-to-high 5 percent range, compared with earlier estimates of mid-5 percent.

First-quarter net income was $1.57 a share compared with $1.46 a year earlier. Sales rose 9.1 percent to a record $8.36 billion from the year-ago quarter.

Slight Premium

Magna has below average revenue “but trades at a slight premium to other cyclical suppliers, which keeps us on the sidelines,” Patrick Archambault, an analyst with Goldman Sachs & Co. with a sell rating on the company, wrote in a May 20 note.

Frank Stronach, who founded the company as a one-man tool-and-die shop in 1957, stepped down from the board of directors last November. He remains honorary chairman. Don Walker became sole chief executive officer the same year after sharing the role with Stronach for the previous five.

“What I can credit is the management having a laser focus on profitability, on return on capital,” Mike Simpson, who helps mange C$6.5 billion in assets, including Magna shares, as a portfolio manager at Sentry Investments, said in a phone interview June 12. “Don Walker and his team are focused on making Magna the best auto parts manufacturer.”

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