Novice Investing - Magnificent Quarter at Magna

Date: Tuesday 13th 2008f May 2008 07:32:16 AM

Magnificent Quarter at Magna - 11/07/2007

By: Hari Wibowo

Our sample portfolio pick, Magna International (MGA) reported third quarter earning this week. Results are magnificent with earning per share (EPS) of $ 1.38 versus $ 1.37 estimate. Magna also raises full year results with sales in the $ 25.7 Billion range which would probably implies an EPS of $ 7.50 for the year.

We estimated EPS of $ 6.47 for year 2006 back then, which implies a 16% EPS growth. Coupled with significant positive net cash of $ 11.75 per share and rising, it is no wonder that Magna shares rose 6.43% higher to $ 99 per share. Currently, with expected earning of $ 6.47 Magna's real price is fairly valued at a P/E of 15. Why P/E of 15? To refresh your memory, we would like our stock to yield us higher than the treasury bond year in and year out. Current treasury rate is 4.5%. Therefore, we would like our share to earn us at least that much. For Magna's case, I feel that 6.5% return year in and year out is reasonable valuation for the share. This translates into Price Earning ratio of 15.3. (1 divided by 6.5%) Therefore, fair value for Magna is 15 x $ 6.47 = $ 97.05 per share. This is what we call 'real price'. However, we have to take into account Magna's cash and long term debt balance. Therefore, real price equation is as follows:

Real price = stock price - (cash+ short-term investment) + long-term debt.
Stock price = $ 97.05 + $ 11.75 - $ 0 = $ 108.8 per share.

With current price of $ 99 per share, Magna has moved closer to $ 108.8 per share by which we would sell the investment. (Remember that we always want to sell at fair value and buy it at significantly below fair value). We picked Magna cheaply at $ 62.60 per share two years back. With its strong third quarter earning, there may be more appreciation left from current price of $ 99. Especially with end of year approaching, Magna will experience a window dressing rally until the end of the year.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Magna International Inc. (MGA) or any other securities.

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