Magna takes hit from lower global vehicle demand, shares slide 10%

Lacklustre global demand for vehicles drove Canadian autoparts manufacturer Magna International Inc. to cut its annual financial outlook, prompting investors to put the brakes on its stock.

The Aurora, Ont.-based supplier’s share price dropped nearly 10 per cent to $64.57 on Thursday after the company reported quarterly results below analysts’ expectations and lowered its guidance based on higher costs for advanced driver-assistance systems, lower vehicle production, especially in China and Europe, and lower sales from a transmission joint-venture in China.

Prior to the disclosure, Magna’s shares had risen more than 15 per cent in 2019. Afterwards, its year-to-date gain fell to about 4 per cent.

“Despite these matters, we remain confident in our ability to outpace production in our markets, generate strong free cash flow, and create value for our shareholders,” chief executive Don Walker said in a statement.

Magna’s adjusted earnings per share of US$1.63 were below analysts’ consensus estimate of US$1.70 per share. But the autoparts maker noted its revenue of US$10.6 billion for the three months ended March 31 fell only 2 per cent even though global light vehicle production dropped 7 per cent.

The results didn’t come as a shock to analysts given challenges across the auto sector.

“We were not surprised by this revision since the global auto market is currently in the later stages of the economic and auto cycles,” BMO Capital Markets analyst Peter Sklar wrote to clients.

“This challenging cyclical outlook supports our investment thesis, which is that during periods of flat-to-declining global vehicle production, it is difficult for auto parts manufacturers to grow earnings,” Sklar noted.

Magna said sales are expected to total between $39.1 billion and $41.3 billion, down from an earlier forecast for between $40.2 and billion and $42.4 billion.

The company estimates that light vehicle production volume in North America will fall to 16.7 million this year, down from its previous expectations of 17 million vehicles. It expects a larger decline in Europe and China, where it revised its expectations down to 21.5 million from 22.3 million in Europe and 4.3 million from 4.7 million in China.

We were not surprised by this revision

General Motors Canada and Unifor said at a news conference this week that there may be opportunities for Magna to do business at GM’s Oshawa facility, which will be transformed into an after-market parts producer and an automated vehicle test track. When asked about the opportunity Magna had no comment, but sources said nothing substantial has been discussed.

As for Magna’s future plans, executive vice-president and chief technology officer Seetarama Kotagiri said there are “big opportunities” for players that are able to advanced driving and automated technologies.

“As emerging areas of technology, there is a relatively higher degree of uncertainty about the level of engineering and other costs required to participate in this area,” Kotagiri said on the conference call.

As such, Magna’s costs were higher than expected after it underestimated how much work would be required to develop new software.

“But by the end of 2020 we also believe that experience gained through this programs will continue to build the foundation for technologies and know-how that should benefit us on future programs including with other customers,” Kotagiri said.

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