Novice Investing - Ford Has Spoken

Date: Tuesday 13th 2008f May 2008 07:00:19 AM

Ford Has Spoken - 10/04/2005

By: Novice Investing Staff

Ford has spoken. It has decided to cut the number of its suppliers and entered a long-term contract to seven of its largest suppliers. One of them is Magna International (MGA), which is one of our portfolio stock pick back in Spring 2005. As of fiscal year 2004, Magna has 16% of its sales from Ford. That is good news, isn't it? Yes, it is.

We believe that more similar deals are coming from other automakers. The move by Ford makes a lot of sense. Consolidating its suppliers will save a lot of money for several reasons. First, Ford can choose to pick the best and most efficient suppliers. This will help its quality control. Second, by using fewer suppliers, Ford can give higher contract to each suppliers. In return, Ford can demand lower price per unit from them. These are win to win situation for both. Finally, Ford can worry more designing vehicles. Ford Engineers can be more creative and there will be less restriction on how to incorporate its design with the suppliers.

If General Motor (GM) and Daimler Chrysler (DCX) follow suit, it will even better news for Magna International (MGA). Sure, some smaller auto suppliers will be hurt by the move. But other remaining suppliers will emerge stronger. Back when we picked Magna, we estimated Earning per Share (EPS) to be at $ 6.10 per share. If the trend of suppliers consolidation continues, we believe Magna can reach that target for this year and the next fiscal year.

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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 other securities.

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