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Andrew Willis: We at Morningstar don’t always agree with the market on the price of a stock. We might wonder: Why is it so Cheap? But in the case of Magna (MG), it’s complicated…
On the one hand, we have one of the world's largest, most diversified auto parts suppliers. A source of Canadian pride that could just about build an entire car with the variety of parts they produce. That means they’d be a great partner for the likes of electric start-ups. On the other hand, Magna does so much that it could be spreading itself too thin, senior equity analyst Richard Hilgert says, with profit margins last year around only 4.5%.
We do currently see a little upside potential left for Magna, however. And there is that one question about what’s happening on the demand side: If automakers are consolidating their suppliers, won’t they prefer a partner with the widest product line?
For Morningstar, I’m Andrew Willis.
Bulls Say
- High switching costs and significant barriers to entry enable sticky market shares.
- Incremental revenue from contracted new business provides revenue growth slightly above global industry production volume and should bolster operating leverage in the near term.
- As automakers consolidate purchases with fewer suppliers, large vendors such as Magna are in the best position to gain share because they can offer a wide range of parts, modules, and complete systems.
Bears Say
- Magna relies heavily on a handful of automakers with its top five customers accounting for 69% of total 2022 revenue.
- The cyclical, capital-intensive nature of the industry means that a modest volume decline could translate into a significant drop in profitability.
- The auto-parts supply industry is highly competitive and customers expect annual, contractual price reductions. Raw material costs are volatile, adding even more uncertainty to margin.
