Magna International Inc. MG-T’s exposure to the struggling electric vehicle market is one of several factors that is weighing on the Canadian-based auto parts company. But with the stock trading near four-year lows, it’s hard to ignore the rebound potential here.
Sure, it may be difficult to see the upside right now given the onslaught of challenges. When Fisker Inc. FSRN filed for bankruptcy this week, it offered a reminder of what Magna – and many other auto parts manufacturers – are up against.
Though the EV startup was hardly established, its failure highlights several issues that many automakers are facing as they ramp up their EV output to meet long-term mandates: Manufacturing costs are high, consumer demand is faltering and some companies are losing money on each sale as they try to take market share from Tesla Inc. TSLA-Q
Last month, prior to Fisker’s bankruptcy filing, Magna said that it had taken a US$316-million charge – in asset impairments and restructuring costs – related to its involvement with the EV maker but hadn’t given up on US$195-million in deferred revenue.
In an e-mail to The Globe and Mail this week, Magna spokesperson Stephen Kurily said, “It would be premature to comment on the Chapter 11 filing, but we are closely monitoring the process.”
The Fisker mess is just one headache.
Input costs have been rising because of wage hikes and pricier materials. As well, production has been slowing. Light vehicle production has essentially turned flat globally. It declined 2 per cent in Europe in the first quarter as the region – and many other parts of the world – faces stiff competition from Chinese imports.
As a result of these headwinds, Magna’s profit declined to US$1.08 per share in the first quarter, lower than estimates from analysts and down from US$1.15 per share in the same period last year, after making adjustments for one-time issues.
Magna’s share price is reflecting this downturn. The stock has slumped 26 per cent so far this year (including a 5-per-cent decline since sexual assault charges became public earlier this month against founder Frank Stronach, who has had no affiliation with the company since departing 14 years ago).
The stock has been cut in half from its recent high in 2021, suggesting that investors are not entertaining hopes for a quick turnaround.
Some analysts are also on the sidelines. Krista Friesen, an analyst at CIBC Capital Markets, said in a note last month that she saw “limited upside catalysts for the name throughout the remainder of the year.”
Still, for anyone with a little patience, there’s a lot to like in the stock.
For starters, concerns about EVs – in which Magna’s parts include electric powertrains and battery enclosures – may be overblown. Though growth has been disappointing, actual sales continue to rise. EVs accounted for 18 per cent of total car sales in 2023, up from 4 per cent in 2020, according to the International Energy Agency.
The IEA expects EV sales in 2024 will be more than 20 per cent higher than last year, with acceleration picking up in the second half of the year as price competition grows more intense.
“There’s a lot of noise in the media right now about EVs, particularly in North America. But we’re looking much longer than the next three-year time horizon, and we’re making decisions based on our view of where the industry is going to be long term,” Patrick McCann, Magna’s chief financial officer, said during a conference call with analysts in May.
“EVs are coming, and it’s a matter of picking the right platforms and the right customers,” Mr. McCann added.
Equally important, the stock has been beaten up to the point where downside risk appears limited.
Popular valuation ratios – such as price-to-book, price-to-earnings and enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) – suggest that the stock is at the low end of its range over the past 10 years, according to figures from S&P Global Market Intelligence.
The price-to-book ratio, which compares the share price to the company’s assets minus liabilities, is just over one, which is the lowest level over the past decade outside the brief selloff during the early months of the pandemic.
What could go wrong in buying the stock on the cheap? A global economic downturn wouldn’t be good for auto sales. A trade war with China, already brewing as some jurisdictions consider raising tariffs on imports, could hurt as well.
But Magna’s share price is already reflecting a lot of pain, while investors no longer seem to believe in the likehood that lower borrowing costs will create an uptick in vehicle sales in the near future – EVs or not.