Is there a secret electric vehicle leader hiding in the Great White North? What’s up with this latest teaser pitch from Motley Fool Canada about an “under-the-radar Canadian disruptor?”
Let’s check it out, shall we?
The ad is for the Motley Fool’s Stock Advisor Canada service (offered at C$99/yr), which is the Canadian version of the “flagship” US Stock Advisor newsletter — it has generally advertised itself as offering one Canadian and one US stock each month, with lots of overlap with its sister publications in the US. This is what they’re promising:
“This little-known Canadian company is on the cutting edge of electric vehicles… self-driving technology… artificial intelligence… robotics… and management expects to see sales grow by roughly 140% in the next 4 years… adding upwards of $10 BILLION dollars to the top line!”
And they make the comparison to Tesla (TSLA), which is no real surprise — if you compare pretty much any company that’s at all involved in the auto industry to Tesla, it will look tiny and undervalued…. Tesla is a cultural and speculative phenomenon led by a polarizing and charismatic leader, you can’t really slot it in with other car companies and expect the comparison to make any sense, but everybody does — from the ad:
“But the cold hard truth about Tesla is that it makes a mere fraction of the vehicles of its more established rivals.
“In fact, there’s a dark horse Canadian company that has produced 3 TIMES the number of vehicles as Tesla…
“Yet its stock trades for roughly 25x LESS!”
We also get some juicy rumors, and the “this company is so obscure you need us to tell you about it” language…
“To top it off, this Canadian dynamo is even rumored to be working on Apple’s top-secret ‘Apple Car.’
“Yet despite all of that… you’ve probably never even heard of this company!”
So what is this stock that Motley Fool Canada think swill be one of the best growth stocks for this year (and beyond)? They say they’ve just issued a “strong BUY” recommendation (the ad is dated April 23), that it’s less than 5% of Tesla’s size, and that “this could be your second chance at Tesla-like returns.” Is that enough?
Indeed, and it may well be that it’s got a “strong buy” recommendation now from Motley Fool Stock Advisor Canada, but we should also note that they also pitched this same stock about six years ago, Thinkolator sez this is another tease for the giant Canadian auto parts supplier and auto manufacturing outsourcing firm Magna International (MGA, MG.TO).
How does Magna match our clues? Well, it has, of course, long been rumored as an Apple partner for the sometimes-believable Apple Car daydreams… and maybe those rumors have a little more substance now than they did five years ago.
Magna is roughly 1/25th the size of Tesla, though that number shifts around a lot (Tesla’s market cap has been at both $550 billion and $900 billion in just the past few months — right now, it’s around $700 billion, 23X the $30 billion market cap at Magna).
And yes, Magna is an important player in the global auto industry, with a long history and a fairly unique position among suppliers… this is from their website:
“Our deep roots in the auto industry go back to 1957, when we began working with General Motors. Today, we make everything from seats to powertrains and are the only auto supplier to build complete vehicles.
“We are at the forefront of a new technological revolution in the automotive industry, and we’re leading the way in all areas of future mobility, with a keen focus on electrification and autonomy.
“We are a leading global automotive supplier dedicated to delivering new mobility solutions and technology that will change the world. Our products can be found on most vehicles today and come from 342 manufacturing operations and 91 product development, engineering and sales centers in 27 countries. We have over 158,000 employees focused on delivering superior value to our customers through innovative processes and world-class manufacturing.”
That’s really where the “Apple Car” rumors started, in fact — with the fact that Magna is one of the largest auto suppliers in the world, and is pretty much the only automotive supplier that offers full outsourcing and the opportunity to build a car without building an auto assembly plant (they’ve been making complete vehicles, without a brand of their own, for more than 20 years). Not unlike FoxConn assembling Apple’s iPhones, I guess — this isn’t a revolutionary manufacturing idea, though it is still unusual in the auto industry, where final assembly is jealously guarded by brand owners.
Magna International shares have enjoyed a strong run over the past six months as interest in that sector has surged, partly thanks to electric vehicle excitement and partly thanks to stimulus and the pandemic-driven suburban flight and collapse of public transit usage. We should note that this has impacted all the companies you can probably imagine in the sector, not just the sexier EV names, here’s a chart for a bunch of these names over the past year, Magna is currently the best of the “real company” non-Tesla names that come to mind (I’m not counting all the LiDAR stocks or EV startups that don’t have revenue yet, and I’m sure I’ve left out some other suppliers as well):
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If you get rid of the manic excitement over this group of stocks over the past six months or so, though, the longer-term trends are less sensational. If we go back to August of 2015, when Motley Fool Canada was pitching this as the company that Apple needs in order to make the Apple Car a reality, then those companies had several weak years when auto sales were generally lower, and the stocks generally clump around the S&P 500 over the longer term…
Just to highlight our target today, however, it has clearly been a halfway decent idea. No Tesla, it’s not up 1,000% in the past few years, but if we take Tesla out of the chart we can see that MGA, in light blue, has almost kept pace with the S&P 500, and been about middle-of-the-road compared to its auto peers (much better than Ford or BorgWarner, a little worse than GM or Aptiv):
And that’s probably the rational question to ask… not whether Magna can be the “Tesla of Canada,” that’s not going to happen in any real way, but whether it can be a relatively good investment in the auto industry. Every legacy auto company is working on electrification and autonomous driving projects, with different timelines and levels of commitment but with a clear focus on bringing out a lot of new cars over the next five years, including a lot of new battery-powered cars… and that represents both opportunity and risk, because most of the profit in the auto industry now is in high-end luxury and in pickup trucks, and a transition to new EV models will probably represent both a new possible profit center for suppliers and a possible loss when products that are currently important to the bottom line cease production to make way for the new.
Magna lays out a pretty good case for their continuing flexibility and adjustment to new trends, including EVs and autonomous features where they believe their investments will grow the business much faster than some of their traditional product areas wither (like transmissions, for example), in their Investor Presentation from a couple weeks ago… and they expect to continue to grow faster than the overall auto market, to improve their margins, and to generate $5.5-6 billion in free cash flow over the next three years (total, not annually).
And while the stocks of auto companies did well in 2020 in anticipation of recovery and bounceback from a terrible Spring and Summer, the actual revenue and earnings numbers were generally weak — Magna had its worst year since 2015, and that means the growth numbers are likely to look excellent in 2021. Analysts see them hitting $7.43 in earnings per share in 2021, up dramatically from $2.50 or so last year (closer to $4 for “adjusted” earnings, though they were generally in the $6/yr range for the couple years before that), and the prediction is that they’ll grow earnings, ignoring that 2020 blip, by 15-20% a year. I’m sure we’re going to see some continuing hand-wringing about the semiconductor shortages that have been plaguing the auto industry in recent months, and which might well continue for the rest of the year and cut into production or cause a bad quarter or two, but trying to bet on the timing of the ebb and flow of that supply chain disruption probably won’t help us much as individual investors.
How does Magna look on the valuation front? Well, the reported PE is obviously crazy because of 2020’s terrible earnings, they have a trailing PE of about 40 (OK, crazy for the “everybody but Tesla” crowd, at least — TSLA has a trailing PE of 1,000 and a 2022 estimated PE of about 100)… but the more normalized valuation for MGA is far more reasonable, at $99 they trade at about 13X expected 2021 earnings, not far from the 11X valuation they carried when I first covered the stock five years ago, and with a dividend yield of roughly 2% (and the dividend has been raised every year for a decade or so, by 8% this year and historically by about 10% a year).
Magna International is not going to ever have Tesla-like performance… but that’s OK. It’s a pretty reasonable idea these days relative to its sector, and it stands out as somewhat more compelling than other auto suppliers who are arguably not quite as diversified or as well-positioned for EV expansion, like BorgWarner (BWA) or Visteon (VC).
They report next Thursday, May 6, and estimates for this quarter have actually been trending down slightly, presumably because of concerns about the impact of recent chip shortages, so it’s certainly possible that the stock will experience some periods of weakness as this year plays out, I don’t want to ignore the fact that shares are sitting very close to all-time highs… but it’s the future that matters, not the past, and that valuation looks entirely reasonable as the world comes out of the pandemic and (presumably) spends more money, particularly if stimulus money continues to find its way into auto sales in the US and China is able to keep consumer demand chugging along.
I would guess that the stock will trade mostly based on their projections for the year — and given that they hosted their Investor Day updates just a couple weeks ago, I’d be surprised if the analysts get caught really flat-footed on this one. I like Magna’s chances as they continue to prepare their manufacturing footprint for the transition to EVs over the next few decades, including their recent advances in China and with their electric solutions, like their eDrive Gearbox and their proposed eBeam technology for electric pickup trucks… but they’ll also have bad years and quarters as they lose business for particular models, or as external factors drive down their revenue on a more temporary basis (like the GM strikes in 2019, or perhaps the semiconductor shortages or any more pandemic-driven shutdowns of factories or showrooms this year).
I don’t own any direct players in autonomous vehicles, electric vehicles or in the traditional auto sector — my favorite play in that space in recent years has been Aptiv (APTV), which I no longer own, but most of the really pure-play new tech companies in automotive are so expensive that it really ramps up the risk of failure… I’d be a lot more comfortable with Magna shares than I would with Tesla, Luminar or the many pre-revenue AV and EV hopefuls that have captured investors’ imagination this year.
That’s just what I think, though, after spending a couple hours reading up on Magna’s progress today — it’s your money, so it’s your thinking that matters here… do you see continued strength for Magna as a supplier of auto bodies, power systems and other components? Think their battery and EV projects will bear fruit, or that there really will be a Magna/LG-built Apple Car someday? Prefer the nosebleed EV growth stories, or worry about overall levels of auto sales as we come out of the pandemic? Let us know with a comment below.