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03/23/15 10:00:03 AM



This week's Focus Stock of the Week is Magna International Inc. (MGA: $106.13), which carries S&P Capital IQs highest investment recommendation of 5-STARS, or strong buy. Based in Aurora, Ontario, MGA is one of the world's largest automotive components manufacturers and the biggest in Canada. We expect that the company will generate about $34.3 billion in revenues in 2015 and $36.4 billion in 2016. Our recommendation is based on our expectation that MGA will benefit from rising global vehicle production, led by growth in the U.S., despite lower total revenues expected in 2015, and that the stock has attractive total return potential.

Magna's operations include producing body, chassis, interior, exterior, seating, power train, electronic, vision, closure of roof systems and modules, as well as complete vehicle engineering and contract manufacturing.

Sales in North America accounted for almost 52% of 2014 revenues, with Europe at 42%, and other international at 6.2%. This excludes revenues from complete vehicle assembly and tooling, engineering and other.

We forecast 6.6% lower revenues for 2015, with decreases largely impacted by exchange rates and regional weakness (notably South America and Russia), as well as lower complete vehicle assembly sales. North America sales should be higher. Revenues are likely to recover 6.2% in 2016.

S&P Capital IQ Equity Research forecasts U.S. new light vehicle sales volume will rise 2.7% to 16.9 million units in 2015. J.D. Power & Associates (which, like S&P, is owned by McGraw Hill Financial) and LMC Automotive project global new light vehicle sales volume will increase 3.2% in 2015 to 89.6 million units and 4.9% to 94.0 million units in 2016.

With volume and exchange rate pressure, Magna operating margins are likely to be near

2014 levels of 7.2%, although we see an upside bias. Significant progress is being made in Europe, we believe, aided by higher production (ex-Russia) in that key region. Meanwhile, Magna is investing heavily in expanding and in new and emerging regions. These actions are likely to aid results in 2015, we expect. The drain from troubled European plants should be mitigated over time as MGA focuses on profitability over revenue.

We view the company's financial position as strong, with $1.25 billion in cash and cash

equivalents as of December 31, 2014, and long term debt of $811 million (including $750 million recently issued to fund shares repurchases). Priorities for using cash are likely to be organic growth in emerging markets; acquisitions; dividend increases; and stock repurchases. In February, MGA announced another 2-for-1 stock split and a 16% increase in the cash dividend.

Our 12-month target price of $127 is 11.3X our 2016 EPS estimate of $11.20, reflecting historical and peer P/E comparisons. After factoring in a reduced share count, we expect EPS of $9.57 for 2015.

With our target price of $127, and a recent 1.7% dividend yield, we see approximately $21 upside for the stock and more than 210% total return potential.

Risks to our recommendation and target price include a slower-than-expected increase in demand for vehicles in general and for vehicles with high MGA parts content in particular, especially in Europe, as well as weaker-than-expected demand in certain troubled regions. Unfavorable currency movements would be a negative as well.

S&P Capital IQ's views on stocks are constantly re-evaluated. Please refer to our most recent publication on this stock to see our current view.


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