Investors gave Magna International Inc. a beating one day after the auto parts maker provided disappointing financial guidance and quarterly profit that fell short of the Street's expectations.
The shares fell nearly 10 per cent in heavy trading on Thursday, despite management's announcement the night before of a substantial dividend hike for the second quarter in a row and record annual profit in fiscal 2010.
The dip follows a 63-per-cent rise in the share price over the last year and offers anyone who believes in Magna's long-term potential a chance to buy in at prices not seen since December.
Numerous analysts cut their price targets for the stock while keeping their ratings unchanged. A slim majority still see the stock as an attractive purchase based on its valuation, the broad recovery of the automotive sector and a more shareholder-friendly atmosphere at the company since the controversial $863-million buyout last year of founder Frank Stronach's multiple voting shares.
Eight of the 15 analysts who follow the stock advise that it's a buy and seven rate it a hold.
Magna increased its dividend to 25 cents (U.S.) a share from 18 cents in the previous quarter, representing the third hike since the company reestablished a quarterly payout last May. Free cash flow topped $1-billion (U.S.) for the full fiscal year and cash on hand rose 58 per cent to $2.1-billion.
The company stood by its revenue guidance for 2011, forecasting growth between 6 per cent and 12 per cent. But investors reacted negatively to Magna's outlook for operating margin, which it expects to remain flat from 2010. Analysts had been expecting margins of 5.5 per cent or better, as the company boosts volume in North America by some 1 million vehicle units, but Magna instead forecast 5 per cent for the year.
Share profit for last quarter also disappointed. Even though earnings per share of 88 cents reflected record fourth-quarter profit, it was less than the $1.02 consensus of analysts' estimates.
Magna pinned the shortfall on several factors: rising prices for both steel and resin, expenses related to the opening of more than 15 facilities around the world including Russia, and costs associated with its involvement in Ford Motor Co.'s electric vehicle program, likely to launch by the end of the year or early 2012.
Despite higher costs, Magna will continue to deliver significant growth, said Michael Willemse, of CIBC World Markets Inc., who rates the shares "sector outperformer."
"We believe investors should look past the near-term drag on earnings," he wrote in a research note published on Thursday.
Mr. Willemse adjusted his 12- to 18-month price target to $65, down from $68. His valuation is based on 11.7 times estimated share profit and 6.5 times estimated earnings before interest, taxes, depreciation and amortization (EBITDA) for 2011. In comparison, Canadian competitors are trading at an average 10.7 times estimated earnings per share (EPS) and 5.3 times estimated EBITDA. And U.S. rivals are valued on average at 13.4 times EPS and 6.1 times EBITDA.
Peter Sklar of BMO Nesbitt Burns Inc. maintained his "outperform" rating on the stock but also cut his price target to $65, down from $70. He values the company at a projected enterprise value of 6.4 times estimated EBITDA for the fiscal year. "The company continues to be valued at a considerable discount to the upper tier of comparable U.S. auto parts companies," he wrote in a note.
But Magna's discount to leading competitors has closed significantly since last summer. David Tyerman of Canaccord Genuity says the shares have already captured the benefits from the removal last year of the dual share structure. Margins will eventually improve, he says, but he warns the new reality for shareholders is a period of low margin growth as the company adds new plants around the world, invests in electric vehicle technology and deals with the slow economic recovery in Europe.
Mr. Tyerman continues to rate the stock a "hold" but decreased his price target to $64 from $65.