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Martinrea International Inc. MRE-TSX
Tuesday's close: $10.49, up 46 cents
52-week trading range: $6.40 to $10.51
Annual dividend: 12 cents for a yield of 1.2 per cent
Analysts' ratings: There were six buys, two holds and no sells, according to Bloomberg data. Target prices ranged from $10 a share as estimated by BMO Nesbitt Burns analyst Peter Sklar to $15 a share by CIBC World Markets analyst Todd Coupland and Paradigm Capital analyst Marvin Wolff.
Recent history: A recovery in North American auto sales has helped shares of the Toronto-based auto parts maker climb 28 per cent (including dividends) over the past year. Canada's third-largest publicly listed parts maker has seen its stock recover after tumbling to a 52-week low last fall amid profit warnings that stemmed from operational woes at two U.S. plants. With progress on solving production glitches, Martinrea announced in May that it was initiating a quarterly dividend of three cents a share. The first dividend will be issued next month to shareholders of record as of June 30. That new dividend policy and encouragement from insiders buying its stock lately has also helped lift the shares. In 2011, Martinrea and a partner bought Honsel AG, a German supplier of aluminum components, for $179-million.
Manager insight: Martinrea is a growth story that should pick up speed now that it is overcoming "growing pains" on its production lines that were adapting to a product launch, says Robert Gill, a portfolio manager with Aston Hill Financial Inc.
After the parts maker received "fairly large contracts" from auto giants Ford Motor Co. and Chrysler Group LLC, it had to adjust its operations, and that meant rising costs and an array of glitches, said Mr. Gill, who began buying Martinrea shares in April. "But we feel that operationally they have been able to work out the kinks, and are finally on a good footing here. Margins are starting to increase."
Martinrea's announcement of a new quarterly dividend is a way to "show confidence in their operational abilities," he noted. "So, they are rewarding existing shareholders, and are drawing a whole new class of shareholders into the name. That is a good catalyst to take the stock higher."
The company currently trades at a discount to its peers at nine times 2013 earnings versus 11.5 times for Magna International Inc. and 10 times for Linamar Corp. "The key is that you would be buying this company [now] at a material discount in terms of valuation, but at the same time, it has above-average industry growth," he said. "You are going to have the bottom line really starting to move, and increasing earnings per share." His one-year target is $12 to $13 a share.
Besides the operational turnaround, Martinrea will continue to benefit from a recovery in the North American auto industry. Another catalyst will come from growing sales of the Honsel plant's lighter-weight aluminum auto parts, which will help vehicles deliver better fuel efficiency versus traditional steel components. The Range Rover SUV's aluminum rear sub-frame made by Martinrea weighs 34-per-cent lighter than the previous steel predecessor.
While a economic slowdown is a risk to the story, forecasts indicate a cyclical recovery in U.S. auto industry is under way and vehicle sales are expected to rise to an annualized 16.5-million units from the current 15.3-million, he said.