1/17/2008
By David Silver

On January 16, Magna International (ticker: MGA) released its financial outlook for full year 2008. The results received a muted response from the market as relatively flat revenue and lower production expectations were offset by the potential that the investments being made to accelerate revenue growth in fast-growing emerging markets such as Russia and China will bring.

Full Year 2008 Guidance:

• Consolidated sales in the range of $24.9 billion to $26.2 billion (compared to 2007 expectations of between $25.0 billion and $26.3 billion).
• Light vehicle production of approximately 14.4 million North America and 15.6 million in Europe (compared to 15.1 million and 15.8 million in 2007 for North America and Europe, respectively).
• Average dollar content per vehicle in North America between $855 and $885 and between $440 and $465 in Europe (compared to between $845 and $875 for North America and between $410 and $435 for Europe).

Our first reaction to the news was somewhat negative. The Company has made solid progress over the past three years of consistently growing its average content per vehicle, but for the full year 2008, the Company expects relatively flat growth in both North America and Europe. However, we feel management is being conservative with its industry seasonally adjusted annual sales rate (SAAR) of 14.4 million for North America and 15.6 million Europe. Our estimates for North American SAAR is between 14.9 million and 15.2 million vehicles, while Europe is roughly inline with our estimation of between 15.6 million and 15.8 million. We understand the basis for management’s concerns; however, we do not feel that the U.S. will slip into a prolonged recession. On the other hand, we do foresee the European economy slowing a little as inflation pressures continue to up tick. As such, we see the Euro depreciating against the dollar and settling in the $1.20-$1.30 range, which in turn will help with European exports.

The Company also expects full year 2008 spending for fixed assets to be in the range of $875 million to $925 million. This investment reflects the continued commitment to support new and replacement businesses in the Company’s existing markets, as well as new investments to expand into high-growth emerging markets such as Russia and other various Asian countries. Magna’s Asian original equipment manufacturers (OEMs) represent the largest arena for growth.

Magna’s alliance with Oleg Deripaska’s Russian Machines Inc. has given it the upper hand in the Russian auto marketplace, ahead of rivals Toyota (which is planning to build its second production facility) and General Motors (which had to import approximately 30% of the cars it sold in Russia during 3Q07). Additionally, considering the experience of Mr. Deripaska and Frank Stronach (Magna’s Chairman of the Board) Magna appears able to finally become a complete vehicle manufacturer. This is still quite a few years away, but the framework is clearly being built.

We continue to view the investment in the fast growing Russian auto market extremely positively. Additionally, the Company currently has a small share of the market in Asian markets such as China and India, but we do foresee a more substantive expansion into these markets over the next three to five years. The Russian marketplace represents the Company’s largest potential for growth; however, that growth will not be fully realized until the 2009 fiscal year. The slowdown in the U.S. economy and potential slow down in Europe will pressure the stock for at least the first quarter of 2008. The Company reports fourth quarter and full year 2007 earnings on February 27. We have lowered our rating to neutral from overweight with a new price target of $75.00.

Wall Street Strategies