Wednesday, December 01, 2010

Magna International (NYSE:MGA): Upgrade to Overweight on Higher Europe Margin Expectations - J.P. Morgan

Magna International (NYSE:MGA) is being upgraded by J.P. Morgan's 1st rated Himanshu Patel this morning.

Patel upgrades his rating to Overweight from Neutral with a $66 price target (prev. $53.50). He is raising his estimates largely on upgraded European margin forecasts. 2011/2012 EPS estimates move to $4.85/$5.90 (prior: $4.25/$4.70).

JPM also shifts valuation methodology to now give full credit for 2011-ending cash as they see growing likelihood that MGA’s excess cash will be deployed in an accretive manner through the next 6-18 months. Their estimates are still based on an unchanged 5x EV/EBITDA multiple and a conservative 13.2MM US SAAR for 2012.

The details:

Raise estimates on higher European margin assumptions. We raise our European margin assumptions in 2011 and 2012 to 3.6% and 6.0% (2.0% and 2.5% previously). We have long argued that MGA’s European restructuring offers significant company-specific value creation potential (YTD EBIT margins are 8.7% in NA vs. 0.6% in Europe—each 1% point in European margin adds $0.35 to annual EPS). Our 6% 2012 European margin estimate roughly assumes that the 80% of Europe that is non-vehicle assembly (i.e., comparable in structural margin potential to NA) reaches 5.6% margin (conservatively still ~300 bps below NA) and that the 20% of Europe that is the Steyr vehicle assembly business is a 2% margin business.

Investors are likely to become much more confident on European margin recovery potential in the next 3-6 months because of 1) announcement of detailed European restructuring plans by management, potentially on Q4 call or at Jan Detroit Auto Show; 2) surging auto sales in Russia partly due to extended scrappage programs (+50% y/y each month since June), a market where higher than expected revenue would clearly be welcomed given significant new MGA capacity being installed currently; 3) accelerating volumes at the Steyr vehicle assembly business (Stery production will firmly turn a corner in Q4.10, with production, as per CSM, +9% q/q and +74% in FY2011 as phased out vehicles like BMW X3 are fully replaced by new high volume vehicles like the Mini Countrymen by Q4.2010).

Cash deployment increasingly likely. More signs are emerging that MGA is willing to deploy its excess cash as recently suggested by the newly empowered management (post recent dual-class share collapse). MGA recently acquired Resil (a Brazilian seat structure maker with $200MM in sales, likely under a $100MM price tag) and has stated it has considered acquiring Pininfarina (a small Italian vehicle design house). Moreover, recent conversations with the company suggest roughly half a dozen small/medium size acquisitions are being actively looked at, making us think as much as $300-800MM of cash could be put to work fairly quickly.

Guidance release may be a catalyst. Magna recently signaled that it will be providing investors more granular financial guidance, much more than it has historically. We think this will likely occur on the Q4 call or at the Detroit Auto Show in Jan. We suspect the company will, for the first time, be prepared to provide next-year revenue and margin range, a multi-year backlog, and guidance on long-term margins (at least for Europe). While the devil will be in the details, we believe this level of transparency can only aid valuation in the long term, and it may even serve as a near-term catalyst depending on the guidance details. MGA has for years been ignored by a large swathe of the investment community for corporate governance reasons and partly also because it happens to be one of the largest and most diversified suppliers globally, yet it provided little beyond annual revenue guidance historically.

Notablecalls: As I mentioned, Patel the the 1st rated analyst in the Space which means the call won't fall on entirely deaf ears.

Note that we will have Auto #'s out today, which could add some fuel to the fire. The big 3 still account for almost 50% of Magna revenue.

People have been trying to get MGA moving after the dual-class share catalyst passed but with little luck. I suspect Patel is what's needed to get it moving again. I'm not going to guess ranges today, though.

PS: Note we have ISM data out today as well.

2 comments:

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GMAT Guidance

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