Magna Earnings: Management Raises Guidance on Second-Quarter Results and Veoneer Acquisition

No-moat-rated Magna MG reported second-quarter earnings per share before special items of $1.50, beating the $1.23 FactSet consensus by $0.27 and up $0.67 from the $0.83 result reported last year. Higher customer volumes on less chip crunch impact and better throughput were partially offset by higher launch costs, increased engineering spending, and continued industry headwinds including the chip shortage, logistics disruption, inflationary cost pressures, rising interest rates, and possible recession in major auto markets. Revenue jumped 17% to $11.0 billion, up from $9.4 billion in the prior year on customer volume, new business backlog, the Veoneer acquisition, and customer cost recoveries. The top line beat consensus by 5%. Organic revenue also increased 17%, outperforming a 14% increase in global production, weighted to Magna’s customer base, by 3 percentage points.

Adjusted EBIT surged 68% to $603 million for a 5.5% margin from $358 million and a margin of 3.8% last year, beating consensus by 22%. Volume leverage and cost initiatives supported margin expansion, partially offset by higher engineering and launch costs plus industry headwinds. Free cash flow was negative $7 million, down $59 million from $52 million last year on a 53% jump in capital spending for new business.

Management raised 2023 guidance including revenue at $41.9 billion-$43.5 billion, up from $40.2 billion-$41.8 billion previously. Adjusted EBIT is forecast at 4.8%-5.2% versus prior at 4.7%-5.1%. Magna’s guidance had not previously included the Veoneer acquisition, which our forecast did. We raised our revenue forecast to $41.9 billion from $41.8 billion and our margin assumption to 4.8% from 4.7%. This reflects the lower end of management guidance as we remain concerned about industry headwinds. Adjustments to our model had minimal effect on our fair value while the time value of money added $2. The 3-star-rated shares of Magna currently trade at a 14% discount to our new $71 fair value.