Should you still hold the stock?

Stocks of a car equipment supplier International Magna In the last trading session on June 7, MGA fell to a 52-week low of $43.44 per share before closing slightly higher at $43.76. Year to date, Magna has lost 26% of its value, underperforming the industry, which is down 15%. Meanwhile, the S&P 500 index rose 12.4% over the same period.

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What’s causing MGA shares to fall?

Investors appear disappointed with the company’s poor results in the last two quarters and its gloomy sales outlook for the year.

Poor results for the first quarter: Magna reported first-quarter 2024 adjusted earnings of $1.08 per share, down from $1.11 per share in the year-ago quarter, and also missed the Zacks Consensus Estimate of $1.28. Sales, although up 2.7% year-on-year, fell short of consensus. Free cash flow turned negative at $270 million in the quarter as the company continues to invest heavily in the development of technologically advanced products. While this would indeed create new opportunities for the company, it would likely strain short-term cash flow and finances.

Reduction of sales guidance for 2024: Magna has revised its 2024 sales forecasts downward, citing the lack of additional Fisker Ocean production, program delays and changes in product mix. It now expects full-year 2024 revenue in the range of $42.6 billion to $44.2 billion, up from previous guidance of $43.8 billion to $45.4 billion. One major setback is the suspension of Fisker Ocean production, which is estimated to impact 2024 sales by approximately $400 million and reduce adjusted EBIT margin by 25 basis points.

Magna’s long-term prospects are encouraging

Despite short-term challenges, Magna is well-positioned for long-term growth thanks to several catalysts.

A wide range of products and services combined with, among others: focus on innovation in electrification and autonomous driving bode well in the long run. The company expects sales in these areas to grow by more than $4 billion over the next three years, with an expected 50% CAGR from 2022 to 2027.

The strength of the Magna portfolio is evident from recent events business winsincluding front camera modules, battery housings and eDrive systems from global OEMs.

Plus Magna acquisition of Veoneer’s Active Safety division strengthened its ADAS segment, targeting more than $70 million in annual savings by 2025.

To ease economic pressures, Magna has undertaken consolidation, restructuring and cost cutting funds, maintaining the adjusted EBIT margin outlook in the range of 5.4-6%.

Magny the balance sheet is strong, with $4 billion in liquidity and a manageable debt-to-capitalization ratio of 34%. The company has investment grade ratings from S&P and Moody’s.

His shareholder return obligation This is evidenced by nine dividend increases over the last five years, achieving an annual growth rate of 5.55%. The company’s annual dividend yield is over 4%.

MGA stock is promising

Despite growth in global electric vehicle sales, the pace of sales slowdown in 2024 has prompted North American OEMs to update their electrification strategies by postponing new programs and limiting production changes. As a result, MGA is expected to face challenges in recovering pre-production, tooling and engineering costs within the expected time frame. Reduced sales prospects for the current year have indeed spooked investors. However, MGA’s long-term narrative remains strong.

From a valuation standpoint, MGA is trading cheaper than the industry as a whole. Looking at the price-to-earnings ratio, the stock is currently trading at 6.91 forward earnings, well off the five-year high of 21.36 and below the median of 9.80. The company has a Value Index of A.

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Of the 18 brokers covering MGA stock, seven have a Strong Buy rating and 11 have a Hold rating, giving the company an Average Broker Recommendation (ABR) of 2.22.

With shares down significantly this year, the Zacks Average Price Target of $59.06 is 33.7% above current levels.

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The Zacks Consensus Estimate for Magna’s 2024 sales and EPS is for year-over-year growth of 2% and 6%, respectively. Consensus estimates for 2025 sales and EPS point to further growth of 4% and 20%, respectively, over 2024 forecast estimates.

We think it’s prudent to stick with this Zacks #3 (Hold) stock for now. You can see see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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