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Growth & Income

Magna International Inc. (MGA - Analyst Report) generated robust earnings growth of 28.7% in the second quarter, driven by strong growth in North American vehicle production. Earnings estimates have advanced since the report, helping this supplier of automotive components reach a Zacks #2 Rank (Buy) on September 18. The company is expected to deliver double-digit earnings growth in 2012. It also offers a dividend yield of 2.4%.

Challenging but Promising Second Quarter

On August 9, Magna International announced second quarter 2012 earnings of $1.48 per share, which topped the Zacks Consensus Estimate by more than 15.6%. This marked its third straight positive surprise.

The earnings improvement was attributable to higher production and sales in North America, which more than offset the impact of challenges in Western Europe. Furthermore, a drop in share count, stemming from repurchases and cancellation of common shares, also led to higher earnings.

Revenues grew 5% to $7.7 million and exceeded the Zacks Consensus Estimate of $7.5 billion. The increase was attributable to higher external production sales in North America and Rest of World, as well as an increase in Tooling, Engineering and Other sales.

For 2012, Magna expects revenues between $29.0 billion and $30.5 billion, compared with $28.7 billion in the prior year. The revenue growth will be driven mainly by higher external production sales between $24.6 billion and $25.7 billion, compared with $24.0 billion in 2011. Meanwhile, operating margin is expected within 5% for the year compared with 4.2% in 2011.

Earnings Estimates Moving Higher

Over the last 60 days, the Zacks Consensus Estimate for 2012 moved up 4.3% to $5.10, while the Zacks Consensus Estimate for 2013 advanced 2.4% to $5.57. The estimates for 2012 and 2013 represent year-over-year growth of 13.6% and 9.2%, respectively

Dividend Indicates Strength

Magna follows a continuous dividend payment policy. The company lowered its dividend payment by 50% to 9 cents per share in late 2008 following the global economic crisis. However, it started raising its dividend from the second half of 2010. In 2012, the company raised its dividend payments by 10%. On September 14, it paid the last quarterly dividend of 27.5 cents per share, representing a yield of 2.4%.

Decent Valuation

Magna is currently trading at a forward P/E of 9.0x, which is in line with the peer group average. On a price-to-book basis, the company is trading at 1.2x, lower than the peer group average of 1.7x. The company has a PEG ratio of 0.91, which indicates that the stock is undervalued given the long-term earnings growth projection of 9.9%.

Chart Shows Strength

The price and consensus chart shows that estimate lines are mostly hovering above the stock from a year ago, indicating that the stock is undervalued and has significant opportunities for growth. It reached its 52-week high of $49.60 on March 2.

Despite weaknesses in Europe, Magna is likely to continue outgrowing its peers, primarily driven by strong vehicle production growth in North America. Furthermore, with stable earnings estimates, a solid dividend yield and a reasonable valuation, the stock is definitely a good choice for investors seeking both growth and income.

Incorporated in 1969, Magna International is based in Aurora, Canada. The $10.8 billion company designs, develops and manufactures automotive systems, assemblies, modules and components, in addition to engineering and assembling complete vehicles, primarily for sale to original equipment manufacturers of cars and light trucks. It operates 296 manufacturing operations and 88 product development, engineering and sales centers in 26 countries.


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