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Important facts to remember about Magna stock
Range of products Magna International (MG, $77.17) is valued by automakers, but the company has long suffered from average margins below 10%.
Revenue grew 10% organically last quarter, but to maintain that market share and improve margins, the company needs to increase process and product innovation.
We welcome Magna’s commitment to spend 7% of its pre-tax profit on research and development, but note that this represents 1% of its total turnover. The most successful automotive suppliers invest 2 to 4% of their turnover and some up to 6%.
At the beginning of the year, we wondered if the Magna MG, with its wide range of auto parts, was a bit scattered.
Last quarter, when organic sales rose 10% and 3% above consensus, investor concerns were allayed — for now. But given the breadth of the company’s products, Richard Hilgert, senior equity market analyst, cautions that the pace and scale of technological innovation must be faster and broader to achieve a sustainable competitive advantage.
Further research could give Magna stock a boost in both revenue and bottom line
We note that Magna’s average economic profit since 2002 is only 2.4%, but we believe that the path to prosperity for the auto parts supplier is R&D rather than cost cutting.
Bull
High switching costs and significant barriers to entry make it possible to maintain stable market shares.
Additional revenue from new contracts ensures revenue growth slightly above global industry output and is expected to strengthen operating leverage in the near term.
As automakers consolidate their purchases from fewer suppliers, larger vendors like Magna are best positioned to gain market share because they can offer a wide variety of parts, modules and complete systems.
Bear
Magna relies heavily on a handful of automakers, with its top five customers accounting for 69% of its total revenue in 2022.
The cyclical nature and high capital requirement of the industry means that a slight drop in volume could lead to a significant drop in profitability.
The auto parts supply industry is very competitive and customers expect annual and contractual price reductions. Raw material costs are volatile, making margins even more uncertain.