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On Mar 26, we maintained our Neutral recommendation on Magna International Inc. (MGA - Analyst Report) based on its better performance in the fourth quarter of 2012 and increased customer preferences for light passenger vehicles. However, we are concerned about the rising raw material costs and the company’s increasing debt burden.

Why Maintained?

On Mar 1, Magna reported earnings per share of $1.49 in the fourth quarter of 2012, which increased 12.9% from $1.32 in the year-ago quarter and outpaced the Zacks Consensus Estimate of $1.14.

Revenues went up 10.8% to $8.03 billion, exceeding the Zacks Consensus Estimate of $7.75 billion. The increase in revenues was driven by improvement in North American and Rest of World (ROW) production sales and higher tooling, engineering and other sales together with improved complete vehicle assembly sales.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for 2013 went up 2.2% to $5.49 per share. Meanwhile, the Zacks Consensus Estimate for 2014 improved 3.7% to $6.53 per share. Currently, Magna maintains a Zacks Rank #3 (Hold).

Magna will benefit from the increased customer preferences for light passenger vehicles. In addition, the strict U.S. government regulation to curb emissions will boost the demand for auto parts and other fuel efficient components.

However, import of parts and other valuable accessories from low-cost countries like India, China, Brazil, Japan and other ASEAN countries will mar the results of the company. In addition, rising raw material costs will be challenging for auto parts and accessories manufacturers such as Magna.
Other Stocks to Look For

Few stocks that are performing well in the industry where Magna operates include Gentherm Incorporated (THRM - Snapshot Report), Visteon Corp. (VC - Snapshot Report) and Denso Corp. (DNZOY). All these companies carry a Zacks Rank #1 (Strong Buy).

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