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Cost-Cutting Actions Aid Magna (MGA) Amid Coronavirus Scare


On May 21, we issued an updated research report on Magna International MGA. The company continues to focus on the innovation and technology development for growth and program launches across its business segments to meet the rising demand for crossover & SUVs. However, soaring costs and operational inefficiencies in the seating segment might I impede its top-line growth. Nevertheless, the company’s cost-control efforts will help sustain margins amid the coronavirus crisis.

Magna beat estimates in each of the trailing four quarters, the average positive surprise being 6.62%.

Q1 Results Impacted by Coronavirus Pandemic

Magna reported first-quarter 2020 adjusted earnings of 86 cents per share, which beat the Zacks Consensus Estimate of 74 cents. However, the bottom line declined from the year-ago quarter’s earnings of $1.63 mainly on lower year-over-year revenues across all segments due to the impact of the coronavirus pandemic.

New Program Launches Stokes Growth

Magna is concentrating on the innovation and technology development for growth and program launches across its business segments to meet the rising demand for crossover & SUVs. These program launches are likely to boost the firm’s prospects. Currently, it is actively working to develop the ADAS technology that will offer basic safety and convenience functions in vehicles. While these are expected to strain the company’s near-term financials, the same bodes well for the long term.

Expansion through Joint Ventures

Magna is expanding its business through joint ventures and hub openings, while divesting non-core units. Early in 2019, Magna inked a framework agreement for an electric-vehicle manufacturing joint venture with an affiliate of BAIC. Later in August, the company marked the opening of a $50-million electronics manufacturing facility in Michigan, which is expected to solidify its presence in Grand Blanc Township and is positioned to continue its leadership in vision-based driver assistance systems. Further, Magna’s $100-million investment in Waymo showcases its commitment to develop new technology. The company is also set to acquire Wipac Czech s.r.o. in a bid to expand its engineering capabilities globally.

Cost-Reduction Actions to Boost Growth

In response to the uncertainty caused by the coronavirus pandemic, Magna has initiated a series of cost savings throughout the enterprise, including substantial staffing adjustments, compensation cuts and drawdowns on revolving credit facilities. The focus on cost discipline is expected to sustain margins amid the financial crisis. Notably, the company had a strong cash position of $1.26 billion as at Mar 31, 2020, as well as term and operating lines of credit totaling $3.3 billion, of which $3.1 billion was unused and available as at Mar 31, 2020.

Few Headwinds to Counter

Weak Consumer Sentiment Amid Coronavirus Crisis

Automotive components supplier, Magna, is likely to feel the heat of the pandemic, which has rattled the auto industry, sending the production and sales for a toss. Such unprecedented challenges have prompted the company to withdraw its 2020 outlook. Weak consumer sentiment and decline in the global light vehicle production amid the virus outbreak is likely to affect Magna’s sales and earnings in the near future.

Magna expects production volumes to decline in 2020, along with a shift to more sales in contract manufacturing. This will likely strain the company’s margins.

Rising Costs to Hurt Revenues

Soaring commodity, warranty and launch costs, and operational inefficiencies in the seating segment are concerns for Magna. Additionally, the automotive industry is undergoing a significant level of technology change. This technology change will require Magna to make substantial amounts of investment and capital spending in order to evolve its business profile toward new products.

Further, the electronics unit of the Power and Vision segment is incurring higher level of engineering and other costs on three automated driving systems (ADAS) programs that are using new technologies. In fact, the company expects these costs to flare up further in 2020, thereby hurting top-line growth. Unfavorable foreign-currency translations and customer-price concessions are also likely to hurt Magna’s bottom line.

Price Performance

Magna, along with Adient PLC ADNT, is part of the Automotive-Original Equipment industry. The company’s stock has depreciated 28.3%, year to date, compared with the industry’s decline of 18.6%.

Zacks Rank & Stocks to Consider

Magna currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same sector are Tesla, Inc. TSLA and Arcimoto, Inc. FUV, each carrying a Zacks Rank of 2 (Buy) at present. You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Tesla has an expected earnings growth rate of 3431% for the current year. The stock has appreciated 97.8%, year to date.

Arcimoto has a projected earnings growth rate 40% for 2020. The company’s shares have gained 39.7%, year to date.

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