Magna Earnings: Healthy Revenue Growth, but Despite Margin Contraction, Guidance Tweaked Higher

No-moat-rated Magna MG reported first-quarter earnings per share before special items of $1.11, $0.24 better than the FactSet consensus estimate of $0.87 but $0.17 below the $1.28 result reported last year. Despite less chip crunch impact, the shortfall was attributable to headwinds including continued but improving chip-related production shutdowns, higher warranty accrual, operational problems in a European facility, higher launch costs, and inflationary cost pressures. Revenue rose 11% to $10.7 billion from $9.6 billion in the prior year as customer call-offs continued but lessened and due to new business backlog. The top line beat consensus by 7%. Organic revenue increased 15%, outperforming a 7% increase in global production, weighted to Magna’s customer base, by 8 percentage points.

Adjusted EBIT dropped 14% to $437 million for a 4.1% margin from $507 million and a margin of 5.3% last year due to the headwinds previously cited. Free cash flow was negative $279 million, down $180 from negative $99 last year as working capital discipline was offset by a 78% jump in capital spending for new business. Despite industry headwinds and increased cash burn, the firm repurchased $9 million in stock and paid $132 million in dividends.

Management tweaked 2023 guidance with revenue at $40.2 billion-$41.8 billion, up from $39.6 billion-$41.2 billion previously. Adjusted EBIT is forecast at 4.7%-5.1% versus prior at 4.1%-5.1%. Magna’s guidance does not include the Veoneer acquisition (see our note dated Dec. 20). We updated our estimates, which includes six months of Veoneer in 2023, to reflect the midpoint of revenue guidance and raised our margin assumption to 4.7% from 4.1% as we remain concerned about industry headwinds for the remainder of the year. Adjustments to our model had minimal effect on our fair value while the time value of money added $1. The 4-star-rated shares of Magna currently trade at an attractive 27% discount to our new $69 fair value.