Novice Investing - Magna Falls, So What?

Date: Tuesday 13th 2008f May 2008 07:26:28 AM

Magna Falls, So What? - 01/16/2006

By: Novice Investing Staff

This has become old news. Magna International Inc. (MGA) reports stellar earnings and its stock price fell. The reason? Magna did not 'beat' expectation. On Thursdsay January 12th, Magna sees higher 2006 earnings and its stock price fell. The company now expects 2006 revenue to be between $ 22 Billion to $ 23.3 Billion. Is that bad? Not necessarily. Let us explain.

We predict Magna to report 2005 earnings of $ 6.10 back in April 2005. Current estimate is $ 6.82 EPS for 2005. Again, even if Magna 'miss' earnings and earn less than $ 6.82 for 2005, we calculate magna fair value to be $ 105.16 per share. So, now, investors are selling Magna for predicting a revenue of $ 22 - $ 23.3 Billion in 2006. With this kind of revenue, Magna will earn more than $ 6.10 per share for 2006. The street's reaction is to sell Magna 7%. That is fine. As we have said a couple of times, Magna will disappoint the street and it still doesn't matter. Why? Because, Magna has a fair value of $ 105.16 per share even with the disappointment.

Is $ 105.16 per share doable? Definitely. The biggest autopart suppliers, Johnson Controls Inc. (JCI) is trading at a forward P/E of 12 right now. It has a negative net cash of about $ 1 Billion. Meanwhile, Magna has a positive net cash of 500 Million.

We predict that Magna will eventually has a fair P/E value of 16. Why? Because, the auto industry is in a terrible mode right now. And yet, Magna still manages to eke in a profit, about $ 6.10 per share of profit annually. With fair P/E value of 16, Magna's fair value is close to $ 100. That is where we get $ 105.16 per share of fair value for Magna stock. When investors realize that Magna is able to produce $ 6.10 per share of profit year in and year out, its fair P/E value will rise eventually.

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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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