Magna International: A Classic Value Stock

Magna International Inc (NYSE:MGA) designs and manufactures auto parts for vehicles and light trucks worldwide.

The company operates through four segments: Body Exteriors & Structures, Power & Vision, Seating Systems, and Complete Vehicles. The company is cyclical, meaning it's sensitive to business cycles.

As a result, revenue and earnings tend to fluctuate with the economy. However, the company has produced solid returns for investors over the long run. Nonetheless, we remain neutral on the stock in the short-term. (See Magna stock charts on TipRanks).

Efficiency Analysis

Large companies such as Magna need to carry a lot of inventory in order to satisfy customer demand. Storing billions of dollars worth of inventory can be quite expensive.

Therefore, the speed at which a company can move inventory and convert it into cash is very important in predicting success. To measure Magna’s efficiency, we will use the cash conversion cycle, which shows how many days it takes to convert inventory into cash. It is calculated as follows:

CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding

39 = 42 + 55 - 58

Therefore, it takes 42 days for Magna to move inventory, and it's able to convert it into cash in 39 days. However, it is interesting to note that both days inventory outstanding and cash conversion cycle have been trending upwards the past 10 years.

Valuation

We consider Magna as an old school value play because it trades at a low multiple, and has a significant amount of tangible assets. As a result, we will value Magna using price to book value. At the time of this writing, the company's price to book value is 1.85. We want to figure out what the justified price to book value is. To do so, we will use the following formula:

Justified P/B = (ROE - Growth) / (Discount Rate - Growth)

For return on equity, we will use Magna's five-year average which is 17.4%.

The growth rate is the rate that the company will grow at "forever." A reasonable assumption is to set it to the expected nominal GDP growth, which we set to 3.52%. We arrived at this number by calculating the expected GDP growth rate in 2026 (the farthest out the forecast goes) that is forecasted by Statista.

For the discount rate, we will use 9.5%. The result is as follows:

Justified P/B = (0.174 - 0.0352) / (0.095 - 0.0352)

Justified P/B = 2.32

Therefore, Magna is currently undervalued.

Wall Street’s Take

Turning to Wall Street, Veeva has a Moderate Buy consensus rating, based on seven Buys, one Hold, and zero Sells assigned in the past three months. The average Magna price target of $109.83 implies 40.6% upside potential.

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Final Thoughts

Magna International is a classic value stock that has the potential for a lot of upside. However, the stock is very volatile, with a beta of 1.55.

The stock has been on a downtrend since June, despite the fact that the overall market was in an uptrend for most of that time. With the overall market looking like it may be poised for a 10% correction from its peak, and Magna still on a downtrend, the stock may still see some more downside in the short-term.

Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.

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