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Magna Outlines 2020-2022 Outlook: What Investors Need to Know

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Magna International Inc. (MGA - Free Report) recently provided financial outlook for 2020 and 2022. While the Canadian auto-equipment supplier forecasts revenue and profit growth through 2022, it anticipates sales to decline in 2020 amid macro-economic headwinds. Further, Magna is calling off the self-driving technology partnership with Lyft.

Why Magma Expects a Sales Dip in 2020

Strengthening U.S. dollar and production cuts by automakers across Europe are likely to weigh on Magna’s top line in 2020. The firm forecasts 2020 sales in the band of $38-$40 billion compared with the 2019 guided range of $38.7-$39.8 billion.

Revenues for 2020 from Body Exteriors & Structures and Power & Vision units are forecast in the range of $16-$16.8 billion and $10.7-$11.3 billion, respectively. Sales from Seating Systems and Complete Vehicles segments are anticipated in the band of $5.7-$6.1 billion and $6-$6.4 billion, respectively. Capex for 2020 is projected at $1.7 billion.

While stronger U.S. dollar, sale of the fluid pressure and controls business, along with lower expected light vehicle production in Europe will likely result in a year-over-year decline in 2020 sales, the company does not anticipate a fall in profit margins.

Net income for 2020 is expected between $1.8 billion and $2 billion compared with 2019 guided range of $1.8-$1.9 billion. Magna’s CFO Vince Galifi expects unfavorable foreign exchange transactions to cost the company $700 million in 2020. However, it expects to offset these costs with ongoing margin-improvement efforts. Lower spending on advanced driver-assistance systems (ADAS) and autonomy,along with operational efficiency in various facilities will likely aid its margins in 2020. EBIT margins for 2020 are expected within 6.7-7% vis a vis 6.3-6.5% expectation for full-year 2019.

Prospects Likely to Improve by 2020

Magna expects sales and EBIT margin growth in 2022 on the back of product launches and business expansion efforts. The firm has been actively concentrating on innovation and technology development for growth across all business segments. Products associated with lower emissions like hybrid dual-clutch transmissions, e-drives, battery frames and lightweighting solutions position it well for future growth. Expansion of the vehicle assembly business in China, and focus on the seating systems unit and ADAS technology bode well.

Revenues and EBIT margin for 2022 are anticipated in the band of $40.5-$43.5 billion and 7.6-8%, respectively, suggesting an uptick from 2020. During the 2020-2022 timeframe, Magna forecasts to generate $5.5 billion of free cash flow. The company is committed toward returning cash to its shareholders through share buyback programs and regular dividend payouts. In this respect, strong cash flow is likely to help the firm treat them well.

Magna Scraps Partnership With Lyft

After almost two years of collaboration, Magna is ending the partnership to co-develop self-driving technology with ride-sharing upstart, Lyft, in a bid to focus R&D spending on more near-term programs. These would include front and rear cameras, surround view systems, and advanced radar systems. The company will continue working on lightweighting and electrification programs, especially in Europe, as tougher emission standards in the continent are pushing automakers to sell fuel-efficient vehicles.

Magna had stepped into the self-driving fray in 2017 via entering into an existing partnership led by BMW AG (BAMXF - Free Report) , Intel Corp (INTC - Free Report) and Mobileye to develop a self driving platform by 2021. In 2018, it had inked a deal with Lyft to co-develop self-driving cars. In 2019, Magna had also teamed up withthe self-driving vehicle technology startup Alphabet Inc.’s (GOOGL - Free Report) Waymo to build self-driving cars in southeast Michigan. Magna has chosen to end the partnership with Lyft as it views fully-driving systems as a longer-term and expensive prospect, and is instead focusing on operational efficiencies.

While Magna is scaling back the ambitious partnership with Lyft to manufacture self-driving systems at scale, it remains open to collaborate with Lyftin the future in several areas related to autonomous developments, including manufacturing hardware and software components for self-driving vehicles.

Last Words

With the auto industry being consumer cyclic, growing consumer spending in the United States bodes well for major auto-industry suppliers like Magna. While vehicle sales in the United States have remained strong, weaker demand in China and Europe is a concern. To add to that, growing technology costs in the electric and autonomous era seem to put pressure on Magna’s bottom line.  Even amid the headwinds, Magna seems to have navigated well, surpassing earnings estimates in three out of four trailing quarters. While 2020 may not turn out to be eventful for Magna, the Zacks Rank #2 (Buy) firm is on track for top- and bottom-line growth over the next three years. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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