Magna Feels Impact from GM & Ford
Magna International Inc.'s (MGA) second quarter, diluted earnings per share were $1.98, a 16% or $0.37 decline from $2.35 reported in the corresponding quarter in 2007. Although Magna is expected to benefit from major business wins and acquisitions, declining volumes and the current squeeze in margin force us to rate the shares a Hold with a six-month target price of $64.00.
Magna commands a strong competitive position in the industry, as it is one of the few providers of a complete range of interior and exterior auto systems to global auto companies. Increasing content per vehicle (CPV) is the main driver of Magna's growth. CPVs in both North America and Europe have been increasing over time.
The launch of new business in the emerging market, particularly China, pushed healthy growth in revenues from Rest of World (ROW). In the first quarter, Cosma International, an operating unit of Magna International Inc. and its joint-venture partner Shin Young Metal Ind. Co. were awarded a major new business by Hyundai Motor Corporation.
Recently, Porsche has signed an agreement with Magna to build two-seater Boxster and Cayman sports cars at Magna's Austria facility from 2012. In the first half of 2008, the company repurchased 3.5 million Class A shares for $245 million. This leaves the company with 9 million Class A shares for additional repurchase until November 2008.
However, we remain concerned about pressure on Magna's margins. Moreover, large original equipment manufacturers (OEM) demand pricing concessions from suppliers. Finally, in North America, sales are falling due to declining volumes, particularly on account of General Motors (GM) and Ford (F).
Barclays Valuation Supported
We are maintaining our Hold on Barclays PLC (BCS), an international financial services group engaged primarily in banking, investment banking, and asset management. In its first half report, Barclays posted net earnings of £1.7 billion, down 35% year over year and below our estimate due to higher impairment and provision charges from credit market dislocations at Barclays Capital.
Most other units performed reasonably well in view of the circumstances. We are cutting our EPADS estimates to $4.00 from $4.50 for 2008 and to $4.50 from $5.30 for 2009, partly reflecting dilution from the issue of 1.6 billion shares in July. In addition, results should continue to reflect turmoil in the US subprime and other credit markets. Positively, Barclays reduced credit market exposures by £5.1 billion during the half. We believe the dividend is safe.
Currently, Barclays is trading at 7.5X the consensus earnings estimate for 2008 and 7.1X the 2009 consensus estimate.
