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Magna Upgraded to Outperform

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We have upgraded our long-term recommendation on Magna International Inc. (MGA - Free Report) to Outperform from Neutral. The company is likely to reap benefits from the new emission standard in the U.S., which will boost demand for new auto parts and other components.

The company’s first quarter 2012 earnings per share of $1.46, surpassed the Zacks Consensus Estimate and a year-ago earnings of $1.30 by 12%. The earnings escalated owing to higher production and sales volumes along with profits generated from programs launched in 2011.

Revenues swelled 7% year over year to $7.7 billion, beating the Zacks Consensus Estimate of $7.4 billion. The increase in revenues was driven by an increase in production and sales in North America, Europe and in the Rest of the World.

Magna is extending its global footprint through significant acquisitions and expansions in recent times. The company, in order to pursue growth opportunities in emerging markets, has entered into a joint venture; MCC Wuhu Exteriors, with Changshu Automotive Trim Co. (34%) and Chery Tech. (15%) along with exterior and interior operating unit (51%) in China. It also acquired a 300,000-square-foot injection molding and painting facility in China.

In the month of January, Magna acquired the assets and business of Vogelsitze GmbH. This acquisition will strengthen the position of the company in the German markets and improve its product portfolio. With this, Magna will be gaining the customer base of Vogelsitze.  The major customers include MAN, Daimler’s (DDAIF - Free Report) Mercedes-Benz, Volvo, Bombardier, VDL and GAZ.

There will be a rise in demand for auto parts and other fuel efficient components for trucks due to the regulation of the U.S government. This new emission standard will boost the revenues and earnings of the company.

Magna anticipates that there would be an increase in total production sales of $3.2 billion during 2012 to 2014. Production volumes will be enhanced to 15.4 million in North America and 14.2 million in Western Europe in 2014. There would be nearly 50% net increase in total production sales in North America, 15% in Europe and 35% in the Rest of the World.

The company has more capital to invest in new facilities and can undertake business expansion plans using the $2.25 billion four-year revolving credit facility. This new credit facility replaced the company’s previous $2.0 billion revolving credit facility, which was due on July 31, 2012.

However, rising raw material prices impart a continuous threat to the company. The prices of plastic resins, rubber, oil and steel have swelled over the years, driven by an increase in global demand.

In addition, emerging markets of India, China, Brazil, Japan and other ASEAN countries only intensify competition for the North American component industry. Global automobile manufacturers are likely to import parts and accessories from the low cost countries from 2015 onwards.

Magna International, based in Aurora, Canada, is a leading manufacturer and supplier of automotive components. The company designs, develops and manufactures automotive systems, assemblies, modules and components, besides engineering and assembling complete vehicles, primarily for sale to original equipment manufacturers (OEMs) of cars and light trucks. It competes with Dana Holding Corporation (DAN - Free Report) and Lear Corp. (LEA - Free Report) .        

Our long-term recommendation is backed by Zacks #1 Rank on the stock, which translates into a short-term (1 to 3 months) Strong Buy rating.

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