Magna: Investor Day Highlights Growth From Electrification and Advanced Driver Assistance Systems

No-moat-rated Magna MG highlighted revenue growth from powertrain electrification, battery enclosures, and advanced driver assistance systems (which includes the acquisition of Veoneer), or ADAS. The firm expects revenue, including joint ventures, from these product areas to grow at around an 87% annualized rate from slightly less than $1.0 billion in 2022 (excluding Veoneer) to $6.0 billion-$6.5 billion in 2025. Because of the big backlog of new business, management targets research and development in these product areas to fall from 110% of revenue in 2022 to just under 20% in 2025.

Including joint venture revenue, management targets a 35% annualized growth rate in powertrain electrification, from $0.8 billion in 2022 to $4.0 billion in 2027. Products in this area include traction e-motors, invertors, onboard chargers, gearboxes, e-clutch, hybrid transmission systems, and integrated e-drive systems. Battery enclosures, which is a highly engineered metal structure, are expected to grow at a 75% annual rate from $0.1 billion in 2022 to $2.5 billion in 2027. ADAS, which includes numerous sensors like radar and camera vision as well as software, grows at a 45% annualized clip from $0.6 billion (excludes Veoneer acquisition) in 2022 to $4.3 billion (including our estimate of $2.2 billion revenue from Veoneer) in 2027.

Management’s unchanged 2023 guidance includes revenue at $41.9 billion-$43.5 billion, with adjusted EBIT forecast at 4.8%-5.2%. We maintained our 2023 revenue forecast of $41.9 billion and a margin assumption of 4.8%. This reflects the lower end of management’s guidance as we remain wary of industry headwinds. Our Stage I forecast was largely unchanged after Magna’s investor day. We expect revenue to grow at a 3.5% annualized rate through 2027 and assume a 6.7% midcycle adjusted EBIT margin, up 100 basis points from Magna’s 15-year 5.7% median. The 4-star-rated shares of Magna trade at an attractive 19% discount to our unchanged $71 fair value estimate.