Magna International Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Magna International Inc. is a global automotive supplier, designing, developing, and manufacturing automotive systems, components, assemblies, modules and complete vehicles.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Magna International is one of the world’s largest automotive suppliers, boasting a broad range of capabilities and a large global presence. The company’s operations are structured into five segments:

  1. Body & Chassis: This segment manufactures body structures, chassis systems, and related components such as stampings, subframes, and crossmembers.
  2. Power & Vision: This segment focuses on the development and production of exterior lighting, driver assistance systems, electronic control units, and power electronics.
  3. Seating Systems: Here, Magna designs and assembles complete seating systems, including seating structures, mechanisms, and fabrics.
  4. Complete Vehicles: This segment is engaged in the contract assembly of vehicles for car companies, including engineering and product development services.
  5. Other: This segment includes a range of other activities, such as tooling and other smaller business.

Magna’s diversified product offering and extensive global presence allow it to serve a wide variety of automakers. It’s important to note that it is not a supplier of raw materials (steel, aluminum, etc.) nor a producer of microchips. The key here is not only supply volume but also the ability to provide complete systems rather than only components.

Revenue Distribution

Magna’s revenue is geographically diverse:

  • North America is its biggest region at around 45%, but the company has strong exposure in Europe with around 40% of revenue. Asia and the rest of the world make up the rest.

By product category:

  • Body exteriors and structures
  • Interiors
  • Power and vision
  • Seating
  • Complete vehicle assembly.

The majority of revenues come from body exteriors, interiors and seating, while new and emerging business like power and vision are becoming a bigger part of revenue. It is important to take note that the trend to EVs is making the power and vision segment more and more important for long-term outlook.

The automotive industry is undergoing a significant transformation, driven by:

  • Electrification: The move toward electric vehicles is disrupting traditional powertrain components, creating opportunities in batteries, power electronics, and related systems.
  • Connectivity and Autonomous Driving: The demand for advanced driver-assistance systems (ADAS), infotainment, and connectivity is growing, with vehicles becoming more akin to computers on wheels.
  • Industry Consolidation: The global industry consolidation among suppliers, driven by factors like global manufacturing and increasing supply chain complexity, forces them to consolidate to have the scale to stay competitive and the resources to provide the increasingly complex system solutions.
  • Shift to Software: The importance of software in automobiles is becoming critical for the whole industry, from the infotainment system to safety systems, so a major focus of many companies is on software and data.
  • Global Competition: The global nature of the auto market means suppliers need to have a global footprint to service all carmakers.

Competitive Landscape

The automotive supply industry is highly competitive, fragmented, and dominated by major players such as Bosch, Continental, and Denso. Key elements for success include:

  • Technological innovation and R&D capabilities, especially in new technology for EVs.
  • Production scale and cost-effectiveness.
  • Global footprint to service major global OEMs.
  • Relationships with OEMs to ensure high-value contracts for components and system supply.

What Makes Magna Different?

  • Complete System Integration: Unlike most other players, Magna has the capability to engineer and assemble entire vehicle systems and even complete vehicles, which provide more profit opportunities.
  • Technological Expertise: MGA invests heavily in R&D to stay ahead of competitors in technology, especially those related to ADAS and EV powertrain components.
  • Brand Recognition: Its long presence in the market creates a certain guarantee that it can deliver to OEMs.

Financial Analysis

Magna’s financial performance has generally been stable, although cyclical. The company reports its financial results in USD, but it conducts much of its business in other currencies.

  • Revenue Growth: Recent years have shown a mix of organic growth driven by new products and acquisitions, however, with the supply chain crisis, overall revenue growth has been slow.
  • Margins: The company’s operating margins are respectable, but somewhat volatile depending on commodity and input costs, as it’s not in position to fully pass all increased costs to its customers.
  • Capital Expenditures: A sizable investment is needed in technology R&D and equipment for all segments, particularly the power & vision segment.
  • Geographic Diversity: Geographic diversification has somewhat dampened the impacts of regional downturns, as it provides a natural hedge against regional economic risks.

Looking at recent developments from their financial reports for 2023

  • In the Q3 2023 financial report, Magna reported sales increased by 12% YoY to $10.7B, however, this was slightly below expectations. Sales are expected to further increase in Q4.
  • The company’s EPS dropped to $0.84.
  • The company increased its 2023 outlook for revenue to between $42.2 billion to $42.7 billion.
  • The company has a solid liquidity of around $3.4B in cash, and $4.6B in undrawn credit capacity.

ROIC

  • Return on invested capital (ROIC) can fluctuate based on capacity utilization and product mix, but in recent years the company has tried to reach double-digit ROIC, which was below average in 2022 due to a lower production volume.
  • Historically ROIC has hovered around the 10% and 15% range, and with high single-digit to double-digit ROIC is common in a normal operating environment.

Recent Concerns / Controversies & Problems

  • Ford’s EV Production Cutbacks: Ford has significantly cut back its EV production which is projected to impact revenues from the growing electric components business.
  • GM Strike: A prolonged strike at GM is projected to have a material impact on the Q4 and 2024 performance for all auto part companies including Magna, as it is expected to lower production volume considerably.
  • Inflation and Supply Chain Issues: Supply chain issues and inflationary pressures have resulted in higher raw material and input costs, which are impacting profit margins. Despite the supply chain pressures being alleviated, this still puts pressure on the company, as price increases with OEMs will take some time.
  • EV Investment: Even though the long-term prospects for the EV industry is bright, there are a lot of investments related to new technology that is necessary to stay competitive.

Moat Analysis: 2 / 5

Magna possesses some characteristics of a narrow moat, with its advantages in technical expertise, scale, and vertical integration within the automotive industry. However, several factors limit the moat’s width and durability:

  • Reliance on OEMs: Magna’s fortunes are primarily tied to the performance and decisions of OEMs. The company doesn’t generate end-consumer demand for their products, as that relies on car makers’ decisions and sales.
  • Low Customer Switching Costs: OEMs typically switch suppliers based on price, which hurts the long-term prospects of ROIC.
  • High Competition: There are several big and capable players in the industry that can quickly implement new technologies and compete with price.
  • Technological Disruption: The EV shift is bringing new entrants into the markets, putting pressure on the old players. The speed of technological advances means that today’s innovation may become obsolete in a relatively short amount of time.

Overall, it seems the company is in an industry with low predictability of earnings.

Understandability Rating: 3 / 5

Magna’s business is complex, but is still understandable if you are familiar with the automotive industry. However, assessing a valuation based on the complex economic and financial data takes some effort. The technology and capital investments are another big thing to keep track of.

Balance Sheet Health: 4 / 5

Magna maintains a strong balance sheet, characterized by a healthy level of cash, adequate debt to equity levels, and sufficient liquidity. It currently has a strong liquidity position of $3.4B in cash and $4.6B in undrawn credit capacity, which enables it to withstand any potential downturns and reinvest in the business. As long as debt-to-equity levels are managed carefully (and they are now managed at an acceptable level), its balance sheet looks to be in good order.

Risks

Here are some legitimate risks that could harm the moat and business resilience:

  • Technological Disruption: MGA must continually innovate and adapt to rapidly changing technology trends in the automotive market, otherwise, it will struggle to maintain profits.
  • Global supply chain disruptions: It’s important for the company to diversify its supply chain and manufacturing capacities, as disruptions can affect production and drive up costs.
  • Reliance on Large Automakers: The company’s reliance on major OEMs means that production slow-downs or changes in the car markets can hurt its revenues.
  • Economic cycles: The company’s earnings are sensitive to economic downturns, as car demand typically slows down with weaker economic outlook.
  • Raw Material Prices: MGA’s profit margins are impacted by changes in raw material and component costs.
  • Geopolitical risks: The company has an extensive global footprint which makes it sensitive to geopolitical risks from numerous countries.

MGA’s moat is still a meaningful competitive advantage, but it is under constant pressure due to the rapidly evolving nature of the automotive sector. A careful approach to the market is necessary in order to take into consideration these risks.