Magna International Stays Big
Magna International Inc. (MGA) enjoys a strong competitive position in the automotive industry as it is one of the few providers of a complete range of interior and exterior auto systems to global auto companies. The company is likely to benefit from the strong focus on emerging markets and margins are expected to expand. The company also has a strong balance sheet and a cash reserve.
The company has a complete product line and has been enjoying increasing content per vehicle. Strong focus on the emerging markets, particularly China, Russia, various countries in Eastern Europe, and Asia is likely to drive revenues and profits for MGA in the coming years.
We remain concerned about pressure on Magna's margins, which we believe will contract further due to an unfavorable business mix. In addition, higher SG&A expenses undertaken for new product launches are hurting the company's operating margin. We are also concerned that the higher raw material prices, which remained at elevated levels in 2007.
On February 27, 2008, Magna International reported fourth quarter and full year 2008 results. In the fourth quarter, diluted earnings were $0.24 per share, compared to $0.26 per share in the prior-year quarter. Profits declined due to a slowdown in the company's vehicle-assembly and higher costs on account of plant closures.
Currently, Magna shares are trading at 10.2x our 2008 EPS estimate of $7.64, which is at a discount to the industry median (12x). We have set a forward P/E multiple of 11.4x to arrive at our six-month target price of $87. The shares are rated Buy.
CLUB Valuation Attractive
We consider the shares of Town Sports International Holdings, Inc. (CLUB) to be undervalued near current levels. The company reported solid Q4 results, with an outlook for 2008 in-line with our expectation. Shares of CLUB are trading at approximately 4.4x our 2008 EBITDA estimate, a multiple which we consider to be excessively low. In light of the company's strong position in its markets, we consider the long-term growth potential to remain attractive.
The shares currently trade at approximately 9x our 2008 EPS estimate. In comparison, the company's only publicly-traded peer, Life Time Fitness (LTM), currently trades at a 52-week low, and at a multiple of approximately 14.6x management's 2008 EPS guidance. Over the last several years, several fitness club chains have been acquired by private equity interests, including 24 Hour Fitness, Fitness First, Equinox, and LA Fitness. These transactions were generally consummated at an EBITDA multiple between 8x and 10x.
Given the current state of the credit markets, the potential for a general economic recession, and uncertainties related to consumer spending, we believe that a discount to this historical range is appropriate at this time. That said, we consider the current multiple afforded to shares of CLUB to be excessively low.
Our $12.50 price target on shares of CLUB reflects a multiple of approximately 5.5x our estimated 2008 EBITDA.