Novice Investing - Earning Per Share Calculation

Date: Thursday 07th 2008f August 2008 01:39:22 PM

EPS Estimation for MGA

This is the heart of our analysis. All we try to do is to predict the company's profit for the coming fiscal year. I spent most of the analysis predicting revenue because without it, there will be no profit! Therefore, predicting revenue is essential for other components of the income statement.

Revenue	2004	%total	2005 (Estimate)	% change from 2004
North America	$ 9.897 B	47.9%	$ 8.05 B	(18.6%)
Europe	$ 4.764 B	23.1%	$ 4.73 B	(0.7%)
Others	$ 5.992 B	29.0%	$ 6.29 B	5%
Total	$20.653 B	100.0%	$19.07B	(7.7%)

Revenue Estimation

Magna's main revenue stream can be divided into three regions: North America, Europe and Others. Total revenue for the year 2004 was $20.6 Billion. Meanwhile, management was predicting revenue of $22.5 Billion for 2005, a 9% increase. However, my prediction shows that revenue will be lower than that. Not that I don't believe management. I believe they, of all people, will know about the company more than anybody. I am just trying to be conservative since General Motor's warning and perhaps future warning from Ford and Daimler Chrysler. The three of them represents 61% of revenue in 2004 and they seem to be having problems in North America. Therefore, Magna's revenue stream might be taking a hit.

Magna predicted 15.8 million units of vehicle production with average dollar content per vehicle of $700-$725. I peg dollar content per vehicle to $700 just to be conservative. However, with the recent struggles of GM, Ford and Daimler Chrysler, I think vehicle production of 11.5 million units are more likely. There are various reasons to this.

First, on Friday 04/09-2005, Ford just warned (as I expected) that profit will miss expectation due to difficult operating condition. (Click here for news) I expect Chrysler to do the same in the near future. Furthermore, General Motor just requested its suppliers to lower component price so that it can compete with Japanese automakers. Combined with high steel price, I would expect Magna to revise its vehicle production for 2005 lower.

In Europe, Magna expects vehicle production to reach 16.2 million units with average dollar content per vehicle of $ 315 and $335. Again, I feel that Magma's main customers will have difficulty competing with their competitors and therefore, I estimate European vehicle production to be at 15 million units with average dollar content per vehicle at $315.

For other regions, I believe demand for vehicles in developing countries will offset the eroding market share of Magna's customers. Therefore, I believe 5% growth from 2004 revenue is likely. Adding the revenues, I get $ 8.05 Billion for North America, $ 4.73 Billion for Europe and $ 6.29 Billion for others. Revenue total for year 2005 is therefore $19.07B

Gross Profit Estimation

I estimate Gross profit margin to hold still at 14% for MGA. For the last two fiscal years, gross profit margin has consistently decreased. However, I believe Magna's main customers will reduce production and produce only vehicles which give higher margin. Therefore, I believe Magna's revenue will decrease but gross margin is less affected by it. At 14%, Magna's gross margin for the year is $ 2.67 Billion.

SG&A Estimation

Selling, General and Administrative Expense was $1.186 Billion during year 2004. I believe management can reduce this cost slightly due to better efficiency. This is due to the fact that Magna is offering to buy all the shares of its subsidiaries: Tesma, Decoma and Intier. Overall, efficiency should increase. Even if SG&A increases in absolute term, revenue contribution from these subsidiaries will increase overall revenue. I estimate SG&A cost to decrease slightly to $1.05 Billion for 2005.

Depreciation and Amortization for fiscal year 2004 is $598 Million. This cost, I believe will rise to $650M due to increased capital expenditure.

Interest & Income tax expense

As of December of 2004, long term Debt stood at $ 768 Million while cash stood at $ 1.52 Billion. I believe MGA earns more interest income from its cash in the bank to offset the interest payments on its long term debt. Therefore, interest expense is $ 0.

Tax rate for Magna is predicted to be around 34% based on the previous fiscal years.

Shares Outstanding Estimation

Magna has 104 million diluted shares outstanding as of April of 2006. I assume shares outstanding to rise slightly to 105 million shares by end of 2005.

Pro Forma Income Statement for MGA	Fiscal year 2005
Revenue	$ 19,070 M
Cost of Goods Sold	$ 16,400 M
Gross Profit	$ 2,670 M
Depreciation, Amortization	$ 650 M
SG & A	$ 1,050 M
Interest Expense	$ -
Profit Before Tax	$ 970 M
Income Tax Expense	$ 330 M
Net Income	$ 640 M
Shares Outstanding	105 million shares
EPS Estimate	$ 6.10

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