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This Canadian Auto Parts Manufacturer Is on Sale

- By Holmes Osborne, CFA

Linamar Corp. (LNR.TO) (LIMAF) is a Canadian auto parts manufacturer. The company is extremely profitable and the stock is cheap. This stock is tied to the strength of the American consumer.

The company has 66 million shares, the stock trades for 62 Canadian dollars ($47.35) and the market cap is CA$4 billion. Trailing 12-month earnings per share are CA$7.6 and the price-earnings (P/E) ratio is 8. The dividend is 40 cents and the dividend yield is 0.6%. It takes 76 cents to buy one Canadian dollar.

Revenues have climbed like a staircase from 2010 at CA$2.23 billion to CA$5.87 billion over the trailing 12 months. That is growth. Free cash flow is listed at CA$526 million on Morningstar and the free cash flow yield is 13.15%. Operating margins are 11.6% and return on equity is over 21%. It is a very profitable company.

I found out about the company by reading Barron's and seeing what Meryl Whitmer is investing in. Whitmer says management thinks they can achieve 20% pre-tax returns on capital and that the company is relentless in containing costs. Management also thinks the company can grow revenues from CA$6 billion to CA$7.8 billion over the next four years due to continued outsourcing by the automotive industry. Whitmer thinks Linamar will earn CA$7 billion this year and CA$9 billion by 2020. She also thinks the stock deserves a higher P/E ratio. In the Barron's roundtable interview, Mario Gabelli (Trades, Portfolio) chimed in that one of his analysts said it was his stock of the year.

The company manufactures transmissions, gears, engine heads, parts for windmills, scissor lifts and equipment to harvest grain. Essentially, they make big metal parts that must be machined. In the last annual report, 52% of revenues were derived in Canada, 11% in the U.S., 6% in Asia, 8% in Mexico and 23% in Europe. It further breaks down revenues into two units: Powertrain (84%) and Industrial (16%). The Powertrain division is engine parts and the Industrial is scissor lifts.

For the first nine months of 2016, earnings per share were CA$6.16. For the quarter, revenues were up 14.3% and operating earnings up 13.7%. The balance sheet shows CA$462 million in cash and CA$1 billion in accounts receivables. The liability side shows CA$1 billion in payables and CA$1.5 billion in debt. Very strong balance sheet.

The Motley Fool in Canada points out that shareholders are up 230% in the past five years. CEO Linda Hasenfrantz was recently at a roundtable with Canadian Prime Minister Trudea and President Trump. As one might imagine, she is against dismantling NAFTA.

Here is my take on Linamar. No doubt it is a well-run company. It is underfollowed in the U.S. If the economy keeps on going, it is a buy. The problem is the auto market needs seven-year financing to keep selling cars. At some point, the American consumer is going to have to stop borrowing so much. When will that day be? Soon, or maybe not soon. Who knows. When the American consumer slows, so will the automotive industry. This is probably why the stock is selling so cheaply for a growth stock.

Disclosure: We do not own any of the stocks mentioned.

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This article first appeared on GuruFocus.