Magna's Profit Soars - Analyst Blog

Magna International Inc. (MGA) reported an increase of about fivefold in profit to $241 million or $2.06 per share in the third quarter of 2010 from $51 million or 45 cents per share in the same quarter of the prior year. The profit outpaced the Zacks Consensus Estimate of $1.50 per share for the quarter.

The higher profit was attributable to a 28% increase in light vehicle production in North America and the ongoing restructuring actions adopted by the company. However, the rise in EPS was somewhat offset by an increase in the weighted average number of shares outstanding to 116.8 million during the quarter from 112.9 million in the third quarter of 2009.

Revenues in the quarter escalated 27% to $5.94 billion, driven by increases in the company's sales in all the segments. It was higher than the Zacks Consensus Estimate of $5.33 billion for the quarter.

Magna generated an operating income of $317 million (5.3% of sales) during the quarter, up from $81 million (1.7% of sales) in the third quarter of 2009. The increase in operating income was driven by higher margins earned on higher sales generated by increased vehicle production volumes in North America, offset partially by the negative impact from a 1% decrease in European vehicle production volumes.

Segment Results

Revenue from External Production Sales segment (which comprises three geographic regions – North America, Europe, and Rest of World or ROW) went up 26% to $4.92 billion. External production sales in North America soared 39% to $3.02 billion, Europe inched up 7% to $1.65 billion and ROW rose 29% to $249 million. These reflected a rise in average dollar content per vehicle by 9% to $1,010 in North America and 8% to $571 in Europe.

Revenues in the Complete Vehicle Assembly segment grew 21% to $519 million as assembly volumes surged 41% or 5,990 units. However, sales in the segment were negatively impacted by weakening of the euro against the U.S. dollar. Meanwhile, revenues in the Tooling, Engineering and Other segment soared 52% or $502 million.

Stock Split

Magna's board of directors has approved a two-for-one stock split of the company's outstanding common shares that will be implemented by way of a stock dividend. The stock dividend will be payable on November 24, 2010, to shareholders of record at the close of business on November 16, 2010.

Dividend Raised

Due to the improved profits, the company has increased its quarterly cash dividend by 20% to 36 cents per share from 30 cents per share in the third quarter of the year. After giving effect to the two-for-one stock split, the increased dividend will be transformed into 18 cents per share, up from 15 cents per share. This dividend is payable on December 15, 2010 to shareholders of record as on November 30, 2010.

Financial Position

As of September 30, 2010, Magna had cash and cash equivalents of $1.66 billion. Long-term debt stood at $62 million, reflecting a low long term debt-to-capitalization ratio of 0.8%.

In the first nine months of the year, Magna's cash flow from operations improved significantly to $958 million from $13 million in the same period of 2009 due to an increase in net income, offset partially by a $185 million decrease in items not involving cash flows.

The decrease in items not involving cash flows included depreciation and amortization and other non-cash charges. Meanwhile, capital expenditures increased by $80 million to $479 million during the period.

Guidance

For the full year 2010, Magna anticipates sales in the range of $23.5 billion–$24 billion based on light vehicle production volumes of 11.8 million units in North America and 12.6 million units in Europe. Complete vehicle assembly sales are anticipated in the range of $2.05 billion–$2.15 billion.

Average dollar content per vehicle is expected to be between $980 and $995 in North America and $545–$555 in Europe for the year. Meanwhile, capital expenditure is expected in the range of $740 million–$775 million.

Our Take

Magna commands a strong competitive position in the industry, as it is one of the few providers of a complete range of interior and exterior auto systems to global auto companies. Increasing content per vehicle is the main driver of the company's growth. Further, the company is gaining from major business wins. These along with the improved results have led the company to retain a Zacks #2 Rank on its stock, which translates to a "Buy" recommendation in the short term (1–3 months).