Monetizing Magna 04/15/2005

Direct competitors include Dana Corp and Lear Corp. It makes everything from auto seat, windows to interior mirror systems. Basically, cars are what Magna does. Its survivals depends on the autoindustry. As of 2004, Magna's main revenue came from General Motor (22%), Daimler Chrysler (23%) and BMW (20%). US sales for General Motor and Daimler Chrysler is under fire as Japanese competitors slowly erode their market share away. This presents a problems as well as opportunities. On one hand, Magna's future revenue stream would be threatened by the continued weakness of its customers. On the other hand, should Magna's stock price fall low enough due to this concern, then we might have a good addition to our portfolio.

Without further delay, here is how Magna compares to the metric that we, at noviceinvesting, use to select stocks for investments.

Magna is also churning out profits despite the difficult environment in the auto industry. Now, all we need to is to figure out how this translates into a higher stock price.

As of 04/14 2005, 10 yr bond yields 4.32%. The stock needs to yield 7% to give it a fair value. I believe that Earning per share for MGA is at its low point for fiscal year 2005. This is due to the cyclical nature of the auto industry. With high raw materials (such as steel) and high gasoline costs, auto suppliers such as Magna is squeezed from the cost side and large customers such as GM is pressing for cost reduction from the revenue side.

A yield of 7% means that Magna is fairly valued at a P/E of 14. However, this time I would put Magna's fair value at a P/E of 16 due to the depressed nature of its current earnings.

 At 16, Magna is still yielding 6.25% which is 2% above the current treasury yield. Based on our EPS estimate, I believe Magna can reasonably earn $ 6.10/share in the current fiscal year. You can look at the details of EPS calculation here.

With a fair P/E value of 16, the real price for MGA is therefore $ 97.5/share. Meanwhile, Cash per share for MGA is $14.64/share and Long Term Debt per share = $ 6.98/share.

Real price = stock price - (cash+ short-term investment) + long-term debt.

Stock price = $97.5 + $14.64 - $6.98 = $105.16/share.

I believe MGA represents a good buying opportunity at the current price of around $65.  This is an industry that is struggling with high commodity and gasoline price. However, Magna has stellar balance sheet to weather the downturn and when things get better, profits expectation will get even higher. Therefore, I will put a buy order for $2,000 on MGA on Friday (April 15th 2005) at around 10 AM EST. This will be in our sample portfolio section along with other stock picks.