With U.S. vehicle sales still well below their 20-year average, it looks like the automotive recovery has plenty of road ahead. In fact, automotive supplier Magna International, Inc. (MGA) recently raised its outlook for vehicle production in both North America and Western Europe.
The company posted exceptional first quarter results, crushing the Zacks Consensus Estimates on revenue and EPS. Earnings estimates have been rising significantly higher over the last several months, sending the stock to a Zacks #2 Rank (Buy).
After a 50% dividend cut in 2008, Magna has been aggressively raising it over the last year. It currently yields 2.0%. Valuation looks very attractive too, with shares sporting a PEG ratio of just 0.7.
First Quarter Results
Magna reported better than expected results for the first quarter of 2011. Sales jumped 34% year-over-year to $7.189 billion, well ahead of the Zacks Consensus Estimate of $6.603 billion.
The company benefited from the continued rebound in automotive sales. External sales rose 35% in North America as vehicle production climbed 17%. In Europe, external sales increased 31% as vehicle production rose 10%.
Sales in the first quarter were divided as follows:
North America: 52%
Europe: 43%
Rest of World: 5%
Earnings per share came in at $1.34, crushing the Zacks Consensus Estimate of $1.13. It was a 33% increase over the same quarter in 2010.
Outlook
In the first quarter release, management stated that the earthquake and tsunami in Japan has disrupted and will continue to disrupt global vehicle production. However, the company expects that the lost production will be recovered later this year or early next year. Moreover, the impact of disruptions hasn’t materially effected the company’s results, nor is it expected to in future quarters.
In fact, management raised its estimates for vehicle production in both North America and Western Europe. The company expects 13.2 million units to be produced in North America, up from its previous outlook of 12.9 million. In Europe, the company expects production of 13.6 million units, up from previous guidance of 13.3 million.
Earnings estimates shot higher off of the strong beat. The current 2011 Zacks Consensus Estimate is $5.08, up from $4.77 ninety days ago. This represents 17% growth over 2010 EPS. The 2012 consensus estimate currently stands at $5.63, up from $5.45 ninety days ago. This corresponds with 11% EPS growth.
Consensus estimates have been trending significantly higher over the last several months, as seen in the company’s Price & Consensus chart:
It is a Zacks #2 Rank (Buy) stock.
Dividend
Magna pays a dividend that yields 2.0%. The company raised its quarterly dividend by 39% to 25 cents per share earlier in the year, marking its third increase in less than 12 months.
However, Magna did cut its dividend in half during the financial crisis in late 2008. Its current dividend is 32% above its pre-recession level though.
Valuation
The valuation picture looks attractive for MGA. Shares trade at just 10.3x forward earnings, a significant discount to the industry average of 14.6x. Its PEG ratio is 0.7, based on a 5-year growth rate of 13.9%.
The stock’s price to book ratio of 1.5 is also well below the industry average of 2.3.
The Bottom Line
The continued rebound in vehicle sales is driving earnings higher at Magna. With the rebound expected to continue, earnings estimates have been rising, and analysts are forecasting double-digit EPS growth over the next two years. Throw in a 2.0% dividend yield, and Magna looks attractive at just 10.3x forward earnings.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.
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