There’s been quite a bit of buzz about the rumored “Apple Car” over the last year or so — with some folks getting ahead of themselves and anticipating an Apple buyout of Tesla, or a new Apple car on the road within this decade… but even if we aren’t going to see an iCar on the roads over the next couple years, it is true that the increasing “computerization” of the car is moving forward at a pretty fast pace, whether it’s increasing automation on the way to self-driving cars or even just better integration of next-generation “infotainment” systems.
And the Motley Fool folks have been pitching this basic idea, the trend of the “driverless car,” for over a year — their most over-the-top teaser pitch about this trend, in ads for their Rule Breakers service, has been the “Warren Buffett’s worst nightmare” ad that implies the power of self-driving cars will destroy Berkshire Hathaway’s GEICO insurance business. The stock hinted at and teased in that ad was Nvidia (NVDA) because of the power of their chips that some automakers, including Tesla, are using in new vehicles — if you find that compelling, NVDA is right back to about where it was when that ad campaign started in the Spring of 2014 so you haven’t missed anything… you can see the article here.
But today we’re on to something a bit different, though loosely based on the same trend — today we’ve got a tease from Stock Advisor Canada, the north-of-the-border version of the Motley Fool’s flagship newsletter, and they’re touting the natural outsourcing partner that Apple (and maybe Google and others) would use if they wanted to take the next step and build their own car.
Interesting idea… certainly Google and Apple are not inclined to get their hands dirty (or shrink their margins) by doing their own manufacturing. So shall we check out the clues and see what they’re teasing?
I thought you’d never ask.
Here’s how the ad gets us started:
“Apple is poised to disrupt the 100-year-old auto industry, calling the car ‘the ultimate mobile device.’ And investors in the Canadian company that can make Apple’s vision a reality could reap huge rewards….
“The birth of autonomous driving technology and the rise of the shared economy are bringing nontraditional, deep-pocketed players like Apple, Google, Samsung, and Uber into an industry that hasn’t seen a paradigm shift since Henry Ford introduced the assembly line in 1913….
“Silicon Valley’s tech giants view Detroit as an industry ripe for disruption. The Big Three auto makers should take notice.
“This may seem like an American conflict—its technology hub versus its former industrial center—but the implications of the mobility revolution will reach across the globe. And the profits will be unequally distributed to a few companies and their fortunate investors. One Canadian stock, we believe, will likely find itself both in the middle of this conflict AND on the winning side.”
The logic of the ad is pretty interesting — Iain Butler, who is the Chief Investment Adviser at Motley Fool Canada, is telling us that when Apple and Uber and Google want to push forward their own designs for autonomous, robotic or semi-robotic cars, they will choose existing auto suppliers to build the parts or assemble the vehicles that they’re developing… much like Apple kept their design fully in-house and financed the equipment needed by their suppliers, but left the actual manufacturing and assembly work to their Chinese outsourcing partners like Foxconn. This isn’t the way Tesla went, of course, Elon Musk actually bought and modernized an old assembly plant for his Model S and future model development… but Tesla is also, thanks largely to their manufacturing investment and their one-off low-volume design, quite unprofitable.
And, says, Butler, they’re likely to choose one particular Canadian supplier who’s vertically integrated and already doing similar “build us a car” outsourcing for luxury brands. And to top it all off, we’re also told that this company is cheap… so what’s not to like?
Well, let’s ID the stock first — here are the clues from the ad:
“Canada’s Best-Kept Secret?
“The reinvention of this company goes back five years, with the hiring of a fresh, talented CEO that helped usher in a new era. The company’s previously unfriendly dual-class share structure was eliminated, removing a corporate governance headache. An aggressive share buyback policy was put into place; the company has spent $3 billion over the past few years, dropping its share count by 8%. Dividends per share have increased 140%. It sold off its least-profitable division for more than $500 million to focus on higher-return initiatives. Under his watch, the share price has tripled….
“Currently trading at around 12 times earnings, around 11 times forward earnings, and with growth estimates around 15%….
“… with a compounded annual earnings growth rate of 23% over the past three years, this company has a track record of making analyst estimates look silly….
“Significantly largely than its closest competitor, it is a turn-key operation for anyone that needs to ramp up production capacity efficiently. This stock has a track record building mass-market models for popular German luxury brands, but those fancy manufacturers like to hide that little detail from their discerning consumers.”
And he tells us that although the manufacturing part of the business accounts for less than a tenth of revenues, that’s the area he thinks could ramp up quickly if the Silicon Valley guys come calling to burst in on Detroit’s bailiwick. So what’s the stock?
Well, we chop up those clues, mince them nicely, then feed them carefully into the chute of the Mighty, Mighty Thinkolator… and the answer comes out the other side, fully assembled and ready to drive off the lot (*small added fee for undercoating and floor mats): This is Magna International (MGA in NY, MG in Toronto).
Magna has a market cap of over $20 billion and annual revenue of $35 billion, making it one of the largest auto suppliers in the world (probably the largest one that’s publicly traded and easily investable in North America — there are larger ones, by some measures, in Germany, Korea and Japan). They did get a new CEO in 2010, though he wasn’t really “new” — before that, Don Walker was the co-CEO, and they have boosted the dividend by about 140% since then and bought back a substantial number of shares (they’ve also boosted revenues by about 50%)… and for Canadian shareholders, the shares have “more than tripled” since the founder, Frank Stronach, sold his voting control of the company back for C$860 million in 2010 (meaning, he got rid of the dual-share structur