Operational Improvements And EV Investments Will Support Future Shareholder Value

Key Takeaways

• Margin expansion from operational excellence and restructuring activities will positively impact earnings and net margins.
  
• Investments in battery enclosures for EVs and share repurchases are expected to boost EPS and drive revenue growth.
  
• Lower production volumes, higher input costs, and increased interest expenses could pressure Magna International's revenues and net margins, alongside uncertainties in income tax rates and earnings recovery.

Catalysts

Designs, engineers, and manufactures components, assemblies, systems, subsystems, and modules for original equipment manufacturers of vehicles and light trucks worldwide.

• Operational excellence activities are projected to contribute about 75 basis points to margin expansion over 2024 and 2025, leading to improved net margins.
  
• Ongoing restructuring activities and reduced gross mega-trend engineering spend for 2024 are expected to result in margin expansion, positively impacting earnings.
  
• Lowering the expected CapEx range by up to $300 million for 2024 while maintaining free cash flow outlook supports future liquidity and potential share repurchases, boosting earnings per share (EPS).
  
• Investments in battery enclosure assembly capacity to support the EV transition are expected to eventually turn into a revenue growth catalyst as EV adoption accelerates.
  
• Restarting meaningful share repurchases, which suggests an increase in EPS and return of capital to shareholders, is anticipated to create shareholder value over time.

Magna International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Magna International's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 4.7% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $8.46) by about February 2028, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, down from 10.3x today. This future PE is lower than the current PE for the US Auto Components industry at 9.4x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.73%, as per the Simply Wall St company report.

Magna International Future Earnings Per Share Growth

Risks

• Lower production volumes in key markets, particularly in North America and Europe, have negatively impacted sales, which could further pressure revenues if the trend continues.
  
• The company is dealing with higher net input costs and new facility launch expenses, which could hinder net margins if not offset by operational efficiencies.
  
• Increased interest expenses due to higher interest rates could impact net earnings, given the debt refinancing activities.
  
• The adjusted effective income tax rate has increased significantly, largely due to unfavorable foreign exchange adjustments, which could affect net income adversely.
  
• The need for ongoing commercial recoveries and settlements, driven by program delays or volume shortfalls, can create uncertainty in earnings as these are not guaranteed future revenue streams.

Valuation

• The analysts have a consensus price target of CA$72.467 for Magna International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$89.81, and the most bearish reporting a price target of just CA$56.91.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $44.3 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of CA$55.15, the analyst price target of CA$72.47 is 23.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.