Financial Analysis Report of Magna International Inc.
Magna International Inc. (NYSE:MGA) is a global automotive supplier with 320 manufacturing centres and sales in 30 countries. The company offers products in body, exterior, chassis, powertrain, seats, electronics, vision, closures, roof systems, engineering service and contract manufacturing. This report is the financial analysis of MGA compared with the industry competitors Continental AG (ETR:CON) and Denso Corp. (DEN) (TYO:6902).
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- Date: 2017-10-04
- Author: Raúl Bartolomé Castro
- Program: Distance Learning MBA
- Module: Corporate Finance
Table of Contents
List of Figures
Figure 1 MGA financial report summary 5
Figure 2 Profitability 7
Figure 3 Efficiency 8
Figure 4 Working capital cycle 9
Figure 5 Liquidity 10
Figure 6 Gearing and interest cover 11
Figure 7 Revenue & earnings 12
Figure 8 EVA & NAV 13
Figure 9 Value by DCF 14
Figure 10 Dividends ratio & TSR 15
Figure 11 Risk-free asset and market risk premium 22
Figure 12 Beta for 2012/2016 23
List of Tables
Table 1 Top 5 global OEM parts suppliers – Ranked by sales in 2016 (Crane Communications Inc., 2016). 4
Table 2 Rating summary 18
Table 3 Profitability rating 19
Table 4 Consolidated statement of income 20
Table 5 Consolidated balance sheet 21
Table 6 Assumption for forecasting 21
Table 7 WACC calculation 22
Table 8 EVA calculation 23
Table 9 DCF and shareholders value calculation 24
Table 10 Assumptions for forecasting CON 25
Table 11 Assumptions for forecasting DEN 25
Magna International Inc. (NYSE:MGA) is a global automotive supplier with 320 manufacturing centres and sales in 30 countries. The company offers products in body, exterior, chassis, powertrain, seats, electronics, vision, closures, roof systems, engineering service and contract manufacturing.
This report is the financial analysis of MGA compared with the industry competitors Continental AG (ETR:CON) and Denso Corp. (DEN) (TYO:6902). Next table presents top 5 OEMs parts suppliers ranked by sales.
Next image presents:
- 9 financial indicators with a ranking result from the comparison with CON and DEN.
- Final evaluation based on 9 financial indicators.
- Comparison of 9 key financial indicators using a chart radar.
- 22 financial values and ratios valid for December 2016.
- Historical common share price for the period 2012/2016.
MGA gets a final evaluation mark of 65%, that sets the company in 2nd position. A value investor with a long to mid-term investment horizon may consider CON as better alternative. The appendix describes the method used to calculate the marking. Investors with strategies in growth, momentum, speculation or short-term horizon might find that the marking method do not match with their best interest.
MGA outperforms in efficiency and shareholders’ return and underperforms in profitability, earnings & revenue and DCF valuation. All three companies obtain same mark in liquidity and financial gearing. Working capital cycle is similar between all three firms.
Profitability, a reflect of how good the company is generating income, is covered by gross profit margin, net profit margin and ROCE. The result is solid but in 3rd position in this comparison. More aggressive purchasing policies and higher value-added products will improve this financial indicator.
Efficiency, an indicator of how good is the company utilizing their assets, is covered by AUR, fixed asset utilization and P/B. MGA is outstanding, translated in 1st position in the ranking. Management should pay attention to over-capacity or obsolete equipment to do not lose its competitive advantage.
Working capital cycle, synonym of how effective the company is with its stock and payments inflows/outflows, is efficient and the same than DEN. Tighten excessive credit to customers and suppliers will improve this indicator.
Liquidity represents how well the company can cover its short-term financial duties, it is codified by current ratio and quick ratio. Financial gearing express up to what extend the organization uses non-current liabilities compared with its assets, it is covered by capital gearing and interest cover. MGA is in a healthy zone, same as CON and DEN and therefore those indicators do not contribute in the marking. MGA should monitor the fast deterioration of interest cover, a reflect of fast growing interest payable.
The indicator earnings & revenue covers the sales revenue and how those earnings are transferred to shareholders, this is marked by revenue, EPS and P/E. MGA is in 3rd position behind of its competitors, a more aggressive buy back program to reduce outstanding shares and control of operation expenses will improve EPS and this indicator as well.
Accounting valuation relies on variables dependent on assets valuation such as NAV and more holistic valuations such as EVA that includes the cost of capital. MGA is in 2nd position behind of CON. An increase in assets and goodwill will improve this kind of valuation.
DCF valuation calculates shareholders’ value for last five years and it is the only indicator that also is forecasted for next ten years. MGA falls in 3rd position. DEN and CON have bigger assets valuation that help them to escalate in the ranking. An increase in asset will help MGA for this indicator.
Shareholders’ return, a proxy of the company in the stock market, is covered by divided yield, dividend payout and TSR. MGA outperforms its peers getting 1st position in the ranking. This is a good signal that markets acknowledge positively, management should keep steadily the current direction.
The data for the current report is based on the financial data from 2012/2016, it has been excluded trailing data that helps in short-term decision making.
MGA presents a ROCE, ratio between EBIT and long term capital employed, that is the highest in 2016 (19.2%) and in average (18.6%). This is the reflect of an efficient utilization of non-current liabilities and shareholders’ equity. The growth has been high (32.9%), but behind of DEN (45%).
Gross profit margin is positive but inferior to competitors in 2016 (14.6%), in average (13.6%) and growth (19.2%). This is the reflect of a high cost of revenue. This might be cause by a strategy for ‘high volume-low margin’ rather than ‘low volume-high margin’. Aggressive purchasing policies and attention to material waste can improve this ratio.
Net profit margin is also positive but behind to its peers in 2016 (5.6%), in average (5.2%) and growth (19.9%). Control in operational and interest expenses will improve this variable.
Considering these 3 ratios, MGA obtains a mark of 50% equivalent to 3rd position in profitability
MGA is efficient in fixed asset utilization, the best in 2016 (2.6 times) and in average (2.9 times), however with a negative growth (-24.0%).
More holistic ratio of efficiency is AUR that presents similar results, MGA is the best in 2016 (2.6 times) and in average (3.0 times) but with lowest growth (-11.2%).
MGA should hold his efficiency that brings a financial completive advantage, upgrade of obsolete manufacturing machines and rational control of asset acquisition will impact positively these ratios.
P/B ratio compares the cost of shares to the book value of company. MGA is positioned in the middle in 2016 (1.75 times) and in average (1.91) but with the highest growth (40.1%). Investors perceive MGA as a company in the middle ground between value and growth.
Considering these 3 ratios, MGA obtains a mark of 78% equivalent to 1st position in efficiency.
Working capital cycle is an indicator obtained by the summation of stockholding period and receivables collection period minus payables payment period. It reflects how fast the company cash in the stock. MGA presents the shortest in 2016 (40.3 days) and average (38.7 days) but positive growth (6.6%). A good manufacturing plan, extension in purchasing credit and tight payable collection will improve this ratio.
Considering these 4 ratios, MGA obtains a mark of 83% equivalent to 1st position in working capital cycle, same as CON.
MGA presents a comfortable financial liquidity situation. Current ratio, a ratio between current assets and current liabilities, is in the middle position in 2016 (1.17 times) and in average (1.35 times) but deteriorating growth (-14.5%). Quick ratio, the division between cash or near cash by current liabilities, is the best between peers in 2016 (0.84 times) and average (0.92 times) but with strong deterioration (-13.4%). A tight control in current liabilities will improve these ratios.
Considering these 2 ratios, MGA obtains a mark of 67% equivalent to 1st position in liquidity, same as competitors.
All three companies present similar financial gearing results. MGA’s capital gearing, ratio between non-current liabilities and total capital employed, is in second position in 2016 (89.4%), in average (77.5%) and in growth (16.9%). MGA takes full advantage of gearing in form of tax shield that brings value to shareholders.
MGA shows very relaxed interest cover ratio, calculated as the division between EBIT and interest expense. MGA is second in 2016 (30.3 times) and very comfortable in average (75.5 times), however deteriorating fast (-67.9%). The deterioration is not an issue but interest expenses should be kept low.
Considering these 2 ratios, MGA obtains a mark of 67% equivalent to 1st position in financial gearing, same as competitors.
MGA presents the lowest revenue in 2016 (36445M$) and in average (34178M$) however the highest growth (18.2%). EPS is low compare with CON, in the middle in 2016 (5.17$), in average (4.16$) and in growth (69.5%). More aggressive buy back program to reduce outstanding shares and control of operation expenses will improve EPS.
The stock market perceives DEN with the highest growth potential as P/E shows. MGA is in last position in 2016 (8.4 times) and in average (9.9 times) with modest growth (2.4%). This result might signal a buy opportunity for value investors.
Considering these 2 ratios and revenue, MGA obtains a mark of 56% equivalent to 3rd position in earnings & revenue.
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