Novice Investing - Magna Shares is Not Magnificent

Date: Sunday 20th 2008f July 2008 12:44:06 PM

Magna Shares is Not Magnificent - 05/11/2008

By: Hari Wibowo

Late last year, we highlighted Magna's magnificent quarter with an expected $ 7.50 earning per share for 2007. At the time, our fair value calculation shows a $ 108.8 per share fair value while Magna was trading at $ 99 per share. Our sample portfolio itself, was picking Magna cheaply at $ 62.60 per share two years ago. That is a good achievement. Unfortunately, we decided not to sell Magna at $ 99 per share which represents 58% return but below its implied fair value. Currently, Magna share is back at the $ 78 per share range which is quite a disappointment to us. Thus, we learn lesson number one with Magna, which is: to sell shares once we have gotten a 50% return even if it is trading below its fair value.

As we waited for two long years for the market to realize the value of Magna's shares, the company has quietly accumulated its positive net cash. (Remember that Magna is profitable all this time). The following table shows Magna's positive net cash (PNC) progression from time to time.

Fiscal Year	2002	2003	2004	2005	2006	2007
PNC	$ 948 M	$ 1.34 B	$ 674 M	$ 1.12 B	$ 1.43 B	$ 2.90 B
PNC per share	$ 9.91	$ 13.90	$ 6.95	$ 10.25	$ 13.01	$ 24.98

With latest balance sheet showing positive net cash of $ 24.98 per share, Magna is quite undervalued relative to its share price. Assuming a conservative earning per share (EPS) of $ 6.50 in 2008 and a fair Price Earning ratio of 15, Magna's fair value is currently at:

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

Stock price = 15 x $ 6.50 + $ 24.98 - $ 0 = $ 122.48 per share.

Magna is definitely undervalued at the current price of $ 78 per share and it would be folly for us to sell it at this time, even at a gain. The stock price fair value is not constant given that the company may use the cash to fund future acquisition which may not bear any fruit, in terms of profitability. The latest such example is Magna's intention to build plug-in hybrid. The cost of the project is relatively small for Magna, but this merely serves as a reminder that Magna's cash balance may deteriorate and hence its implied fair value.

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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