We reiterate our Neutral recommendation on Magna International Inc. (MGA), which is a leading manufacturer and supplier of automotive components. Based in Aurora, Canada, Magna designs, develops and manufactures automotive systems, assemblies, modules and components, besides engineering and assembling complete vehicles, primarily for sale to original equipment manufacturers (OEMs) of cars and light trucks. The product portfolio includes automotive interior and exterior systems, seating systems, body and chassis systems, electronic systems, powertrain systems and roof systems.
Magna released its financial results on August 05, 2011 for the second quarter of the year. The company posted a decrease in adjusted profit to $272 million or $1.11 per share in the second quarter of the year from $315 million or $1.39 per share in the prior-year quarter.
Revenues in the quarter rose 24% to $7.34 billion, driven by an increase in sales in all its operations. However, operating income decreased by $5 million to $362 million in the second quarter of 2011, mainly due to higher cost of goods sold (27%) and selling, general and administrative expenses (11.5%).
The recent regulation formulated by the U.S. government to curb emissions is expected to stir up demand for auto parts and other fuel efficient components for trucks. The new emission standards will be implemented from 2014 followed by more stringent requirements in 2017.
Moreover, with a view to strengthening its footprint in the emerging markets of Asia, Magna opened three new facilities in St Petersburg, Russia. Further, the company recently formed a joint venture with two more parties to purchase an existing injection molding and painting facility located in southeast China. These new ventures along with the existing operations will work together to serve the Russian markets and other Asian markets.
Last month, Magna entered into a $2.25 billion four-year revolving credit facility with a group of lenders replacing the company’s previous $2.0 billion revolving credit facility that was due to expire on July 31, 2012. This new deal has increased Magna’s capital availability for investment in new facilities and other business expansion plans. Moreover, Magna also received a $2.1 million tax credit from the Michigan Economic Growth Authority (MEGA) Board for an expansion project at the company’s facility located in Grand Blanc Township.
However, the rising raw material costs are expected to pose a considerable threat to the earnings of the auto parts and accessories manufacturers, including Magna. The prices of plastic resins, rubber, oil and steel have increased considerably due to enhanced global demand, mainly led by the emerging economies of China and India.
Secondly, we are concerned about the pressure on Magna’s margins, which we believe will contract further, due to an unfavorable business mix. Moreover, large OEMs, which are cutting costs to improve profitability, demand pricing concessions from their suppliers. This is again translating into pressure on Magna’s margins.
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