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Stock to watch: Magna still a bargain in high gear

Guests are seen during the Magna International annual general meeting in Toronto on Thursday, May 10, 2012.

Aaron Vincent Elkaim/THE CANADIAN PRESS

Magna International Inc.

Thursday's close: $60.86, up 57 cents, or 0.9 per cent

52-week trading range: $37.68 to $ 61.27 a share

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Annual dividend: $1.11 a share for a yield of 1.8 per cent

Analysts' ratings: There were 11 buys, 6 holds and 3 sells, according to Bloomberg data. Targets ranged from $48.12 a share as estimated by Guggenheim Securities analyst Matthew Stover to $71.87 a share by Credit Suisse analyst Christopher Cer.

Recent history: Shares of the Aurora, Ont.-based auto parts giant have surged 42 per cent (including dividends) over the past year on rebounding sales of North American vehicles. Its stock hit a 52-week high of more than $60 earlier this week - a level not seen since January, 2011. Magna stock took off in mid-2010 after its founder Frank Stronach proposed giving up his controlling, multiple-voting shares for a $863-million (U.S). in cash and common shares. The controversial share buyout, which had been challenged by some institutional investors, got court approval last summer. After Magna shares pulled back to the mid-$35-range later in 2011, its stock has been on an uptrend. The company has reported financial results that have beaten Street expectations for five consecutive quarters. It also rewarded shareholders with a dividend hike in March. Magna is set to report first-quarter results on May 10. The consensus estimate is $1.44 for adjusted earnings per share.

Manager insight: Magna shares have been motoring, but remain a bargain amid investor concern about the weak European economy, says Alex Ruus, a portfolio manager with Toronto-based Blumont Capital Corp.

"It's still a table pounder," said Mr. Ruus, referring to its stock trading at a single-digit price-to-earnings multiple. "Magna is a global leader in its business, and has a pristine balance sheet with net cash of about $1-billion."

The company's European presence is "one of the big overhangs" on the stock, but that is more than factored into its shares, said Mr. Ruus, who bought most of his Magna stock for his funds after Mr. Stronach proposed giving up his multiple-voting shares. "The reality is that, despite its European exposure, earnings estimates are going up, and the company is thriving."

Magna, which raised revenue guidance after releasing fourth-quarter results in March, is projecting sales of $32-billion to $33.4-billion for 2013 compared with $30.8-billion in 2012.

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Auto sales are increasing due to rapidly rising demand in Asia, while the North American market continues to improve from depressed levels, he said. "Europe is going to struggle for a year or two, but it will eventually come around."

Magna also does a larger-than-average amount of business with luxury car makers like Daimler AG, maker of the Mercedes-Benz vehicles, and Bayerische Motoren Werke AG, which has the BMW brand, he said. "If you look at the luxury market, those companies continue to take market share, and are doing really well. So suppliers to those companies benefit."

Shares of Magna shares trade at about 8.5 times his forecast earnings of $7 a share for 2014 and 9 times consensus earnings of $6.53 a share. "I have a $90-target over the next 18 months," he said.

Since the departure of Mr. Stronach, Magna has been returning more free cash flow to shareholders so you have seen aggressive dividend increases in the last three years, Mr. Ruus said. The risk to this play is a slowdown in the global economy affecting auto sales, but "it is not a scenario that I believe will come to past."

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