Magna Misses, Profits Fall

Zacks

Magna International Inc. (NYSE:MGA - News) posted a decrease in profit to $272 million or $1.11 per share in the second quarter of the year from $315 million or $1.39 per share in the prior-year quarter (all excluding unusual items). With this, the company has missed the Zacks Consensus Estimate of $1.36 per share.

Revenues in the quarter rose 24% to $7.34 billion driven by increase in sales in all its operations. However, operating income decreased by $5 million to $362 million in the second quarter of 2011, mainly due to higher cost of goods sold (27%) and selling, general and administrative expenses (11.5%).

Cost of goods sold increased $1.4 billion to $6.5 billion from $5.1 billion in the second quarter of 2010. Cost of goods sold as a percentage of total sales increased to 88.3% from 86.4% in the second quarter of 2010.

Revenue from the External Production Sales segment (which comprises three geographic regions – North America, Europe, and Rest of World or ROW) escalated 25% to $6.13 billion on a 2% increase in vehicle production volumes in Europe and flat vehicle production volumes in North America.

External production sales in North America went up 20% to $3.53 billion, Europe increased 32% to $2.26 billion and ROW swelled 48% to $335 million.

Sales in the Complete Vehicle Assembly segment grew 23% to $728 million, while assembly volumes surged 57% or 35,224 units. Sales in the Tooling, Engineering and Other segment went up 14% to $484 million.

In the first half of the year, Magna’s cash flow from operations deteriorated to $203 million from $588 million in the same period of 2010 despite an increase in net income, due to unfavorable changes in non-cash operating assets and liabilities. Capital expenditures increased to $370 million from $289 million in the year-ago period.

As of June 30, 2010, Magna had cash and cash equivalents of $1.74 billion. Long-term debt stood at $69 million as of that date. The long-term debt to capitalization ratio was as low as 0.78% as of the above date.

Magna International Inc., 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 of cars and light trucks. Its primary competitors include Dana Holding Corporation (NYSE:DAN - News) and Lear Corp. (NYSE:LEA - News).

Despite the improved results, we remain concerned about the pressure on Magna’s margins, which we believe will contract further due to an unfavorable business mix. Moreover, large OEMs, which are cutting costs to improve profitability, demand pricing concessions from suppliers. This is again translating into pressure on Magna’s margins.

As a result, the company retains a Zacks #3 Rank (Hold) in the short term (1 to 3 months) and we recommend the shares of the company as “Neutral” for the long-term (more than 6 months).

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