Hey there,
In our opinion, Magna is the best publicly listed autoparts manufacturer. That said, it continues to be a difficult environment for the auto industry and as it is very cyclical, Magna is subject to that cyclicality. Today, Magna is trading at only 11 times forward earnings and long-term, we have no concerns with owning Magna. It will, however, require some patience in this environment.
Magna is also under recent pressure due to the fact it took on $800M in debt to fund the acquisition of Veoneer's Active Safety business. In this environment of high rates, any debt issuance to fund acquisitions is likely to be met with a negative reaction by the markets and Magna is down by ~10% since that announcement in early March.
All in all, however, it remains arguably one of the best autoparts companies in the world and the recent downtrend could be an opportunity to accumulate in advance of the next upcycle. On the company's most recent quarterly conference call, it mentioned that it was booking record business despite 2022 headwinds. Worth noting, it is not without risk as the longer the auto industry remains under pressure, the worse it is for Magna. The company describes the operational issues quite succinctly in its last quarter call, so I'll quote them here. It helps understand why there are current issues, and what needs to be resolved for Magna to rebound:
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"The year started with continued supply chain disruptions, most notably the lack of semiconductor chips, which was expected to improve considerably during '22, but instead remain an issue throughout the year.
Although vehicle built recovered from the 2021 levels, OEM production schedules remained volatile throughout 2022, which drove significant inefficiencies in our operations, including tapped labor, overtime and staffing availability issues to name a few. It also had an adverse impact on our ability to achieve our continuous improvement plans and optimize our cost structure across the company. We also started 2022 expecting net input cost inflation of about $275 million year-over-year.
The conflict in the Ukraine created additional input cost pressure, particularly in energy, and China's zero COVID policy resulted in lockdowns and further supply chain pressures. These factors drove an additional $290 million of net cost headwinds, primarily energy-related."
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As you can imagine, several of these headwinds were expected to be 'over' by now but still persist. The biggest impact right now is the volatility of OEM production schedules, tight labour situation, rising inflation costs and the subsequent impact on wages, all remain current challenges. Will these eventually subside? Yes. However, it may still take some time and persist for the balance of Fiscal 2023.
Mat