The share price of Magna International Inc. MG-T bounced off its lows this week, suggesting that some brave investors believe that key players within the beaten-up auto parts sector are now too cheap to ignore.
But the ride could be bumpy: Bad news related to trade, geopolitics and economic activity have been weighing on companies like Magna for much of the past year – and the uncertainty is lingering.
Magna, based in Aurora, Ont., is an auto-parts powerhouse that produces key components in more than two dozen countries for every major automaker.
This diversification helped drive the company’s annual sales to US$36.2-billion in 2021, up 11 per cent from 2020 and well ahead of the 4 per cent gain in global vehicle production.
When times are good, Magna can easily outperform automakers (well, if you ignore Tesla). From the start of 2020 through the middle of last year, Magna’s share price increased nearly 69 per cent, beating both General Motors Co. and Ford Motor Co. by an average of seven percentage points over the same period.
If you want to bet on car sales, Magna is a good place to start.
But the company is facing a number of obstacles that have pushed down the share price by 36 per cent since June.
One obstacle: The chip shortage that began with the pandemic and is persisting amid trade and manufacturing slowdowns.
Last August, Magna identified the shortage as a key reason for missing its own profit expectations, and said that production disruptions are weighing on its financial guidance – a sobering outlook that deflated the stock.
The second obstacle: The war in Ukraine and sanctions against Russia.
The war has cast further doubts on the ability of semiconductor manufacturers to secure much-needed resources, such as neon gas, krypton and palladium. Russia produces about 20 per cent of the world’s nickel used to make lithium-ion batteries, so sanctions could slow electric-vehicle production as well.
“While we had previously hoped that auto production would normalize to prepandemic levels by year-end, the recent invasion of Ukraine has forced us to revisit that view,” Thomas Feltmate, senior economist at Toronto-Dominion Bank, said in a note this week.
Mr. Feltmate slashed his estimate for North American vehicle production this year to 15 million units, down 500,000 from his previous estimate and well below 2017 and 2018 levels.
Russia’s invasion of Ukraine in February caused further upheaval for Magna when Volkswagen – a key parts customer – announced on March 3 that it was suspending its production operations in Russia amid global sanctions.
Magna announced on the same day that it, too, will idle its six plants in the country, which generated US$345-million in sales in 2020. While that’s just 1 per cent of the company’s total revenue, it’s more than Magna’s sales from Britain or France, and clearly a setback for growth.
The third obstacle: With U.S. inflation running at its highest level in four decades, the Federal Reserve has begun to raise interest rates in an effort to cool things down.
As a result, financing costs are going up at a time when gas prices are soaring – neither of which is good for vehicle sales. What’s more, some economists are growing alarmed that the bond market is signalling that the U.S. economy could be heading into recession.
Does this look like a good time to pounce on an economically sensitive stock like Magna?
The share price closed at a 16-month low on March 14, after falling 22 per cent over the previous three weeks amid considerable gloom for the auto-parts sector.
The sharp decline raised the question of whether the stock was at last fully reflecting dismal expectations, with a valuation too low to ignore. Since then, the share price has rebounded nearly 10 per cent, suggesting that the stock may have emerged as a play on better days ahead.
Still, some observers aren’t convinced that Magna’s recent lows presented a buying opportunity.
Michael Glen, an analyst at Raymond James, upgraded his recommendation on the stock on March 16 to “market perform” from “market underperform” – but that is the equivalent of moving from “sell” to “hold,” which isn’t exactly a ringing endorsement.
“We feel it is extremely important to stress that there remains a significant amount of uncertainty surrounding global auto production through the balance of this year. As such, we remain cautious overall,” Mr. Glen said in his note.
This week’s rebound is promising, but hardly a compelling reason to expect big gains ahead.
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