Magna International Inc. has been struggling to turn around some troubled operations in Europe for several quarters, but difficulties emerged in North America in the third quarter that contributed to profit skidding 62 per cent.
The European operations remain the focus of Magna's repair efforts – one of three underperforming operations was sold in the third quarter, leaving two left to fix – after profit fell to $102-million (U.S.) or 42 cents a share from $266-million or $1.14 a share a year earlier, missing analysts' estimates.
Problems gearing up some North American operations to produce parts for new or redesigned vehicles surprised analysts, who also cited an increase in tax rates and expectations that the problems in Europe will persist well into next year for a 2.1-per-cent drop in Magna's share price Thursday on the Toronto Stock Exchange.
The troubled European operations posted lower losses in the third quarter than they did earlier this year and are expected to continue to improve in 2012, "but I would say if we get them back to break-even by the end of the year, I'll be happy," chief executive officer Don Walker said during a conference call Thursday.
Mr. Walker spoke from China, where Magna executives took the company's board of directors to examine some of its operations in one of the world's fastest-growing vehicle markets and a country where Magna is investing heavily.
He outlined a litany of issues in North America, however, including significant overtime costs, high costs of shipping some parts by premium air freight and overcapacity at one facility.
"We have a lot of product which is running overtime and we've had to move product around," he said.
Those issues appear to be temporary, said analyst David Tyerman, who follows the company for Canaccord Genuity in Toronto.
One positive development, Mr. Tyerman noted, was that Magna bought back about 5.5 million of its shares during the quarter and has renewed a normal course issuer bid that calls for it to buy back up to another 12 million. The share buyback is a good use of capital, said one portfolio manager who holds Magna shares.
But a boost in the tax rate in the quarter and the expectation that taxes will be significant higher next year weighed on the shares, said analyst Michael Willemse of CIBC World Markets Inc.
Steve Arthur, who follows Magna for RBC Dominion Securities cut his target price on the shares to $51 (Canadian) from $54.
Magna provided a slightly more optimistic forecast for sales, saying its outlook now is for 2011 sales to be between $28.1-billion (U.S.) and $28.9-billion, compared with a previous forecast of $27.5-billion to $28.9-billion.