Novice Investing - Earning Per Share Calculation

Date: Sunday 20th 2008f July 2008 12:49:09 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	2005	%total	2006 (Estimate)	% change from 2005
North America	$ 11.476 B	50.3%	$ 9.75 B	(15.0%)
Europe	$ 5.072 B	22.2%	$ 5.33 B	5%
Others	$ 6.262 B	27.5%	$ 6.89 B	10%
Total	$ 22.810 B	100.0%	$ 21.97 B	(3.68%)

Revenue Estimation

Similar with last year, Magna's main revenue stream can be divided into three regions: North America, Europe and Others. Total revenue for the year 2005 was $22.81 Billion, an increase of 10.7% year over year. Despite unfavorable condition, North America still accounts for 50.3% of total sales. We believe that the rest of the world will grow faster and Magna will increase sales at a 10% rate for the rest of the world. For Europe, growth might be slower but it will still grow nonetheless. We peg Europe to grow around 5% this year. Meanwhile, we remain cautious on North America. Our prediction may be wrong, but to be on the safe side, we estimate North American sales to plunge 15% for 2006.

These revenue estimation is fairly rough but for the time being, it is safe to say that our estimate is pretty conservative. For example, for North American revenue to plunge 15%, one would need absolute chaos which are characterized by high unemployment, rampant inflation, high corruption rate and bureaucracy and sluggish investment rate. None of this happens as of today. But if it does happen, it is already incorporate in our valuation for Magna stock.

Gross Profit Estimation

Gross margin fell to 13% for Magna's fiscal year 2005. This has been a continuing trend for the last three years. We fervently believe that gross margin cannot go any lower in 2005, but it did. Magna made it up instead with the pick up in volume. We still believe that gross margin won't go any lower and if it did, Magna will again make it up with the increase in sales volume. As we guide conservatively for revenue, our gross margin estimate for Magna is to rise slightly to 13.5%.

SG&A Estimation

Selling, General and Administrative Expense was $1.198 Billion during year 2005. I believe management can reduce this cost slightly due to better efficiency. However, since the bulk of cost saving was on fiscal year 2005 due to several acquisitions, we do not expect material cost reduction for fiscal year 2006.

Meanwhile, Depreciation and Amortization for fiscal year 2006 is predicted to be flat at $ 650 Million. The reason is that Magna did not do any material acquisition during 2005. Even if it makes huge acquisition this year, the increase in depreciation cost will be more than offset than the rise in revenue of the combined entity.

Interest & Income tax expense

As of December of 2005, long term Debt stood at $ 700 Million while cash stood at $ 1.682 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. In 2005, tax rate was around 31%.

Shares Outstanding Estimation

Magna share count increase markedly from 104 million diluted shares to more than 109 Million shares currently. Assuming the same amount of increase for fiscal year 2006, share outstanding by the end of the year will stand at 114 Million.

Pro Forma Income Statement for MGA	Fiscal year 2006
Revenue	$ 21,970 M
Cost of Goods Sold	$ 19,004 M
Gross Profit	$ 2,966 M
Depreciation, Amortization	$ 650 M
SG & A	$ 1,198 M
Interest Expense	$ -
Profit Before Tax	$ 1,118 M
Income Tax Expense	$ 380 M
Net Income	$ 738 M
Shares Outstanding	114 million shares
EPS Estimate	$ 6.47

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