Magna International: No Rush To Start A Position

Magna International Inc. reported Q2 earnings with flat sales, missed EPS, and lower EBIT compared to the previous year. The company attributed its lackluster performance to the global automotive slump, especially in Europe, leading to downward revisions in the 2024 and 2026 outlook. Market demand for vehicles, slow adoption of EVs, and overall worldwide weakness pose challenges for Magna International, keeping me cautious about starting a position. 

Introduction 

Magna International Inc. (NYSE:MGA) recently reported Q2 earnings, which were negatively received due to poor year-over-year results and revised guidance for '24 and '26. The stock price has declined significantly since my first article recommending holding off due to tight margins, declining efficiency, and poor revenue growth. The company saw a -30% decline, compared to the S&P 500's (SPY) 5.5% increase. Here, I review the numbers, comment on the outlook, and explain why I'm still hesitant to start a position. 

Q2 Results 

Let's start from the top. The company's sales came in at $10.96B, which was more or less flat year-over-year (-0.2%) and missed the consensus by $50M. Non-GAAP EPS came in at $1.35, missing consensus estimates by $0.10. Adjusted EBIT came in at $577M, lower than the $616M it achieved the year before. In GAAP terms, the company's EPS came in at $1.09, compared to $1.18 the year before. 

On the margins side (GAAP terms), the company's gross margins saw a slight improvement year-over-year (13.36% vs. 13.09%), while EBIT and net margins were down 50bps and 23bps year-over-year, respectively. On adjusted terms, as the company likes to highlight, the Adjusted EBIT margin came in at 5.3% vs. 5.6% the year before, and 4.8% vs. 4.9% for the six months ended June 30 vs. the year before. 

This lackluster performance can be attributed to the overall slump in global automotive activity, especially in European markets. NA saw light vehicle production up 1%, China up 6%, while Europe saw a 5% decline, leading to this underperformance. Furthermore, Detroit-based customers declined 5%. So, the lack of year-over-year progress certainly didn't help, but what put the company down completely was the management's updated outlook to the downside. 

The company updated its 2024 assumptions. The only change in the production part was the weakness in the European segment, while the company also adjusted FX numbers. These numbers led to the 2024 outlook being adjusted downward. The Power & Vision and Complete Vehicles segments saw a slight decrease in sales, leading to a decrease in the total sales outlook. Furthermore, the company introduced changes to its adjusted EBIT margins and capital spending. 

Overall, the report was not great. It appears that Europe is struggling with the demand for vehicles, as evidenced by the lower sales. Moreover, the company's efficiency seems to have declined. In my first article, I mentioned that the management could improve operational efficiency by 150bps. This does not seem to be the case here, as the slump in demand in Europe may have pushed it further out. Since reporting these numbers and adjustments to the outlook, the company saw around a 9% decline in share price. Of course, the market-wide selloff in the last couple of days didn't help either. 

Comments on the Outlook 

The company is reliant on the overall global demand for vehicles. The outlook is not as promising as a couple of years ago due to the much softer demand for EVs. The adoption rate of BEVs has been much slower than anticipated, which will affect the company's sales, and the downward adjustments indicate it is a material issue. I believe EVs will be the future, but currently, many people are not upgrading due to high maintenance expenses. ICEs are more economical, and bridging the gap with hybrid vehicles seems to be the way to go right now. Many people share this view, as hybrid vehicles are outpacing EV sales. This should soften the blow overall, but I don't think it will help its top-line growth significantly. 

Recently, Tesla, Inc. (NYSE:TSLA) reported delivering almost 444k vehicles in Q2, above consensus estimates. However, margins took a hit since the discounting of the vehicles meant there wasn't enough demand at previous prices. At least MGA doesn't rely on a single car manufacturer for its revenues, but the overall worldwide weakness means there will be further pressures on operations and efficiency. 

In terms of margins, I would like to see signs of at least bottoming over the next few quarters. I want to see if the company can achieve higher efficiency. It is very dependent on overall market demand for vehicles and has limited control over it. The company claims to be "taking steps to address the new market dynamics" and is committed to "margin expansion, capital discipline, and free cash flow generation" by "restructuring {their} complete vehicle cost base to adjust to lower volumes in the near term." All of this is supposed to be evident going forward, especially by 2026. These are good promises in theory, but I will be convinced once I see some progress.