Magna shares are reeling from tariffs. And they're worth a look

Globe and Mail

5 days ago

The share price of Magna International Inc. MG-T has been battered over the past several years by rising inflation, rising interest rates and, now, rising tariffs. What will it take to get the share price rising?
Capitulation – the point at which just about everyone has given up on a turnaround, signalling that shares may have hit rock bottom – might be the best hope for investors brave enough to bet on a stock that is facing a lot of challenges.
From a recent high in 2021, the share price has fallen about 60 per cent. That's a severe dip for one of the world's largest auto parts companies and a key supplier to top vehicle manufacturers in North America, Europe and China.
Part of the problem is that vehicle production has run into economic headwinds in recent years, as central banks raised their key interest rates in a battle against surging inflation.
Though inflation has subsided, consumer confidence has tanked this year as U.S. tariff policies threaten to disrupt, among other things, the integrated automotive sector.
In its latest quarterly results, released in May, Magna said U.S. and European light vehicle production fell 5 per cent and 8 per cent, respectively, year-over-year.
Its sales in the first quarter fell 8 per cent from the same period last year. Earnings declined 28 per cent as margins shrank.
What's arguably worse for investors, though, is the fear of what's coming.
Trade-related chaos and a U.S. policy shift away from incentivizing electric vehicles mean Magna's future performance is difficult to pin down. No wonder the shares trade at just nine times trailing earnings.
What's more, the company has taken on a lot of debt since acquiring Veoneer Active Safety for US$1.5-billion in 2023.
The purchase increased Magna's leverage ratio – which compares debt to EBITDA, or earnings before interest, taxes, depreciation and amortization – to a lofty 2.5. The company aimed to reduce this ratio to below 1.5 times EBITDA by the end of 2024.
That didn't happen. The ratio is currently sitting at 1.9 times EBITDA. Moody's Ratings doesn't expect it to fall to the company's target until the end of 2026 because of weak market conditions.
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Magna has responded by pausing share repurchases 'given the uncertainty that we have in the market,' said chief executive Swamy Kotagiri during a call with analysts last month.
One other thing to worry about: Magna's sales are falling faster than the market for light vehicles, which is a troubling development if the market continues to soften.
After analysts at CIBC Capital Markets accounted for Magna's geographic sales weighting and excluded its complete vehicle manufacturing, the company still underperformed the market by 1 per cent.
Nonetheless, the dismal market conditions that have weighed heavily on Magna's share price may entice some investors looking for a turnaround opportunity.
This isn't as outrageously risky as it may appear.
The share price bottomed out on April 8, when the S&P/TSX Composite Index also touched its low point for the year. Magna's share price has since rebounded about 17 per cent, suggesting the biggest concerns about tariffs are now fading.
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Indeed, Magna expects that tariffs may not be the huge issue that initially panicked investors.
The company estimates the direct tariff impact in 2025 will be about US$250-million, which is less than what some analysts had feared. Even better, Magna expects it can pass along these additional costs to its customers.
After this update, Ryan Brinkman, an analyst at J.P. Morgan, raised his 2025 earnings forecast (before interest and taxes) by more than 8 per cent, to US$2.06-billion, and expects the shares to rebound given the low valuation.
The lingering issue is what tariffs will do to the vehicle market or, for that matter, the broader economy.
Cox Automotive reported last month that the average vehicle transaction price in April increased 2.5 per cent month-over-month, marking one of the sharpest increases in the past decade.
That's more bad news for anyone betting on an auto parts company. But with Magna's share price already caught in a four-year slump, the bad news may be adding up to an opportunity.