Thursday, December 15, 2011

Car Parts For Xmas

With all the uncertainty swirling around the markets combined with December tax-loss selling, prices are down and value ideas continue to pop-up here and there. I have initiated an opening position in Magna International (MG), the car part giant @$34. MG is a wounded giant that is out of favour. Being a consumer discretionary industrial exposed to Europe is not helping MG right now. MG has suffered from problems with some European operations, reduced margins due to high commodity prices (steel and resins) and poorly priced contracts written during the last few years. However, there is good news:

- margins may improve if commodity prices fall. MG purchases $3billion/year in steel and resins.
- under performing operations are being fixed or sold, writedowns taken accordingly.
-car sales are strong even with the global economic uncertainty. 13.6 Mill units in Europe, 13.0 Mill U.S.
-new contracts with Asian OEM's, diversifying revenue base.
-expanding plant capacity in emerging markets like Brazil and China.
-OEM's are reducing there supplier base, signing deals with larger more stable suppliers like MG.

MG is trading at <6X pre-tax earnings power and close to tangible book value. The balance sheet is super strong with no net debt and $6.50/share in cash. A dividend yield of 3%. Some overhang has also been removed with the elimination of the dual class share structure at MG, a longtime criticism of the firm. The downside appears to be limited with MG.

MG's Canadian competitors include Linamar (LNR), EXCO (XTC) and Martinrea (MRE) and as group trade at a premium to MG with average an P/Book of 1.2X, P/S 0.5X.

MG's American competitors include Johnson Controls, BorgWarner, TRW, Meritor, American Axle, Dana and Superior Industries. These companies, many of which are debt laden, trade at and average P/Book of 2.0X and P/S of 0.6X.

MG is worth somewhere in the low $50's and should produce a fine investment result over the next 2-3 years.


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