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Ready To Buy the Dip? This Auto Stock Is a Smart Buy

Reading the title, you might wonder if I would mention Tesla. But the current market dip has presented an opportunity to buy another auto stock with exposure to the electric vehicle (EV) sector. This auto stock is Magna International (TSX:MG)(NYSE:MGA) – a one-stop shop for all automotive needs. It is the fourth largest automotive component supplier, supplying everything from power terrains and seats to complete vehicle production to automakers worldwide. 

Auto stocks on a decline 

Taking a macro view of the auto industry, it is in deep red. It is feeling the heat of the semiconductor supply shortage, rising commodity prices, inflation, and weak production in China and Germany. China is facing waves of lockdowns, and Germany an energy shortage since the oil and gas supply from Russia stopped. All this has escalated input costs.

Last month, one of the largest automakers Ford Motors CEO warned of a US$1 billion inflation bill in the third quarter. A large inventory of partially built vehicles affected deliveries of all automakers. Auto dealers are facing vehicle shortages, hinting that supply is failing to meet demand. 

Both traditional automakers, like Ford (-43%) and General Motors (-45%), and auto startups, like Rivian (-67%) and Fisker (-56%), underperformed the stock market this year. Magna performed better, with its stock price down 39% year to date. It serves most of these automakers, diversifying its revenue streams and mitigating the risk of one car underperforming the other. 

Magna stuck in short-term industry headwinds 

Despite the diversification across different automakers, Magna is not immune to automotive supply chain issues. Its second-quarter sales rose 4%, as production strength in North America (14%) offset weakness in China (-5%) and Europe (-1%). However, the stronger US dollar and rising input costs reduced Magna’s EBIT margin to 3.8% from 6.2% in the second quarter of 2021. 

In the first half, auto sales grew as demand was strong, but automakers could not deliver because of supply bottlenecks. Magna CEO Swamy Kotagiri warned that high inflation and rising rates could impact consumer demand in the second half. 

The falling profit margins and a slowdown in sales pulled Magna stock down. The stock could fall further in 2022. It is not just a 2022 weakness. Magna’s revenue fell in two of the last three years (-3% in 2019 and -13% in 2020) as the auto industry matured. Despite this, Magna has growth catalysts that could attract value investors. 

Magna could benefit from long-term tailwinds 

Magna used these years of the slowdown to tap automotive megatrends:

  • Vehicle electrification – Magna has developed an electric power terrain in partnership with LG Electronics. Magna expects this segment to grow at a compounded annual growth rate (CAGR) of over 15% in the 2021–2027 period. 
  • Advanced driver-assistance system (ADAS) – The company has collaborated with BlackBerry for next-generation ADAS. It expects this segment to grow at a CAGR of more than 30% by 2027. 
  • Battery enclosures – Management expects this segment to grow at a CAGR of over 20% by 2027. 

The key catalyst for Magna is the electric vehicle revolution. EVs will bring two-pronged growth for Magna in the form of increased content per vehicle and a higher addressable market. The company will benefit from overall EV sales as it has partnered with 24 of the top 25 EV suppliers.

This auto stock is a smart buy at the dip

After reviewing the bullish and bearish case, Magna is a stock to buy on the dip. It trades at an attractive valuation for a company with double-digit growth prospects. Magna’s 0.40 price-to-sales ratio is higher than that of Ford (0.33) and General Motors (0.39) but lower than Rivian’s (64.7). Magna has $5.3 billion in liquidity to keep its operations going and pay its debt obligations without any dividend cuts. 

All you need is patience. Between October 2020 and May 2021, the auto industry enjoyed pent-up demand and policy support for EVs with no supply headwinds. At that time, Magna stock surged 110%, hinting at what the automotive rebound looks like. Magna is back to its October 2020 level, giving you an opportunity to be a part of the rebound rally. 

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