Wolfe Research has initiated coverage on Magna International (NYSE: NYSE:MGA), assigning the automotive supplier a rating of Underperform with a price target of $33.00.
The firm expressed concerns about the company's growth prospects, citing a combination of industry challenges and company-specific issues that could hinder earnings.
The report highlighted that Magna's earnings growth in 2025 might be limited due to a flat production environment and persistent mix headwinds.
Wolfe Research also pointed out the company's limited visibility into a backlog levered to legacy Original Equipment Manufacturers' (OEMs) electric vehicle (EV) volumes, along with a history of operational challenges.
Magna faces structural challenges within the supplier sector, including competition from Chinese firms, disintermediation by OEMs, and new market entrants.
The analyst noted that Magna lacks clear technical superiority or dominant market share in key segments, and approximately 90% of its revenue is dependent on US and European OEMs, which are losing market share.
The report additionally criticized Magna's capital allocation strategies. Historically, Magna generated between $1.5 billion and $2 billion in free cash flow (FCF), returning most of it to shareholders. However, FCF has deteriorated as the company invested heavily in the EV and advanced driver-assistance systems (ADAS) businesses of legacy OEMs, which have not yet yielded returns.
The investment strategy has added approximately $1.5 billion of excess leverage to Magna's balance sheet, constraining its ability to conduct buybacks, as post-dividend cash flow is projected to be just $200 million for the current year.
Wolfe Research's subdued confidence in Magna's earnings outlook, combined with the numerous secular pressures facing the company, led to the belief that there is limited potential for the stock's multiple to expand beyond the lower end of its historical range of 6x to 9x.
In other recent news, Magna International reported robust second quarter 2024 sales of $11 billion, with an adjusted EBIT margin of 5.3%. Despite slower battery electric vehicle adoption rates leading to program delays, the company is adjusting its 2024 margin outlook, narrowing the EBIT margin range to 5.4%-5.8%. In the face of these challenges, Magna International is undertaking strategic steps including restructuring its complete vehicle cost base and reducing engineering spend.
RBC Capital recently adjusted its outlook on Magna International, reducing the price target to $47.00 from the previous $57.00, while maintaining its Sector Perform rating. This adjustment comes as Magna International provided guidance for the second half of 2024, indicating an expected surge in EBIT across its business segments.
InvestingPro Insights
In light of Wolfe Research's analysis, it's noteworthy to consider additional insights from InvestingPro. Magna International (NYSE:MGA) has demonstrated a commitment to shareholder returns, having raised its dividend for 14 consecutive years and maintained dividend payments for 33 consecutive years. This consistency is reflected in a current dividend yield of 4.57%, which is particularly attractive for income-focused investors. Additionally, Magna is recognized as a prominent player in the Automobile Components industry, which may offer resilience despite the current challenges cited by Wolfe Research.
However, investors should be mindful of the company's current valuation and profitability metrics. Magna is trading at a P/E ratio of 12.07 and an adjusted P/E ratio of 9.64 for the last twelve months as of Q2 2024, suggesting a high valuation relative to near-term earnings growth, with a PEG ratio of 2.06 indicating potential overvaluation based on earnings growth expectations. Furthermore, the company's gross profit margins stand at 13.11%, which may be considered weak in comparison to industry standards.
For those considering an investment in Magna, it's important to note that analysts predict the company will be profitable this year, and it has been profitable over the last twelve months, as evidenced by a basic and diluted EPS of $3.44. Nonetheless, 10 analysts have revised their earnings downwards for the upcoming period, which could indicate potential headwinds for future profitability. For a more comprehensive analysis, including additional InvestingPro Tips, investors are encouraged to visit the InvestingPro platform.
InvestingPro offers 9 additional tips for Magna International, which can provide deeper insights into the company's financial health and market positioning. As investors weigh Wolfe Research's underperform rating, these additional metrics and tips from InvestingPro could offer a more nuanced view of the company's investment potential.
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