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Magna International (MG, MGA) Stock | NYSE: MGA | TSX: MG

Covered by Stratosphere

Supplying the World's Auto Parts

Magna International Inc. ("Magna") is one of the largest international suppliers of automotive parts. It designs and creates a plethora of different vehicle parts and engages in tooling, engineering, and vehicle assembly services. The company has a global focus and maintains a contractual relationship with every major vehicle manufacturer in the world.

If you drive a car, there is a high chance there are parts from Magna within it. There is also a high chance you did not think of where those parts come from. That’s a good thing - it alludes to the quality and reliability of parts and systems it produces. Magna is an exceptional auto parts and systems supplier with an intense focus on research and development and staying ahead of its competition that stems from its entrepreneurial culture.

Stratosphere Score

6

Growth

1

Valuation

10

Quality

4

Margins

2

Dividend

8

Balance Sheet

7
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  1. Magna is the third-largest automotive parts supplier that has a relentless drive to innovate and produce the greatest next-generation products and systems for vehicles worldwide.

  2. Magna's high-quality parts and systems are what make up a car - the customers to which it sells (automakers) are "assemblers" of these parts. Magna is essentially the source of the innovation even though automakers get all the credit.

  3. Its decentralized management structure and local focus underscores the company’s focus to serve the world. Each plant runs like a separate business with one thing in mind - win business, and lots of it.

  4. The electric vehicle ("EV") and autonomous driving megatrends present great opportunities for Magna to capitalize on. Magna has been focused on these areas for many years and has been partnering with electronics and EV manufacturers to bring new technologies to market.

  5. The company is just as focused on innovating within its own operations as it is on innovating for marketable products. Magna has been investing heavily to streamline its operations, improve productivity, and engineer the best products and systems in the world.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Sum of the Parts

Whether you know it or not, you probably drive a car with Magna parts. Magna supplies 58 OEMs across the globe and its parts and systems can be found on two-thirds of vehicles around the globe.

Magna has built a strong reputation based on being the only automotive supplier in the world that equips every aspect of a vehicle. The biggest car brands in the world - Volkswagen, Toyota, and Daimler - contract Magna as a trusted provider of products and systems for their reliable, reputable cars.

Thousands of engineers and tens of thousands of manufacturing and assembly workers come together to build exceptional products that beat the competition almost every time.

Magna's focus on taking a "holistic" view of each vehicle separates it from the pack and delivers an edge over its closest competitors - Robert Bosch, Denso Corporation, and Continental AG. After all, the OEM is simply an "assembler" of the auto parts it chooses to purchase from auto parts and systems innovators like Magna. Each car is worth the "sum of its parts", and Magna’s high-quality, next-generation parts and systems make an OEM's finished product stand out among others.

Economies of Scale

As crucial members of the vehicle manufacturing supply chain, it is critical to OEMs that its parts and systems suppliers are as close as possible to their own manufacturing facilities. 

Magna has built out a global presence, having established almost 350 manufacturing facilities and around 90 product development, engineering, and sales centres across 28 countries to serve its customers.

The massive global scale and proximity to customers allows Magna to take advantage of economies of scale and the ability to serve its customers to the best of its abilities.

When Magna first establishes a plant in a new local market, the plant is not yet full-sized. As volume and demand increase, Magna builds out capacity at these first-generation plants with smaller incremental investments.

Therefore, Magna enters a market with smaller capital investments, gains customers, and efficiently builds out capacity to satisfy rising demand. We believe this exemplifies Magna’s lean approach to gaining economies of scale.

Magna's Global Production NetworkSource: Magna Investor Relations

Decentralized Management

Given the size of Magna and the number of customers it serves along with their unique needs, target markets, and regions served, managing all these locations through centralized management could lead to poor decision making that may conflict with customers' needs. 

For this reason, Magna operates under a decentralized structure. Paul Bellack, Magna's Chief Information Officer, said that although Magna is worth more than $30 billion, the company is operated "more like 300 $100 million companies".

In running each plant as a separate business, the general manager focuses on winning business for his or her own plant. Each plant is its own profit centre and corporate incentives are derived based on the profits it can generate. Each plant and its decentralized management team, therefore, is focused on growing as big as possible by winning as many customers as possible.

Decentralization allows Magna to enter new markets and penetrate expansion opportunities quickly and aggressively. In this highly competitive industry, it also helps Magna get to and support its customers quicker than its competitors.

Magna's Manufacturing Plant Buildout StrategySource: Magna Investor Relations

Building Barriers

Magna has inherently built out a moat through its global expansion and decentralized management. The barriers that back up this moat through high customer switching costs and impenetrable barriers to entry from new competitors can be briefly and intuitively summed up as follows:

  • A 60-year history of working with the world's largest OEMs as a trusted provider with a strong brand name in the auto manufacturing business makes Magna the supplier of choice to the world's top car companies.

  • Magna's maintenance and growth capital requirements are substantial - it is highly unlikely smaller customers can put up initial investments to match or surpass Magna's scale especially when considered with the fact that Magna is the third-largest parts and systems supplier in the world.

  • Magna is still a top supplier despite having long-term supply agreements with customers that can be terminated by the customer at any time. OEMs continue to choose Magna, which alludes to the idea that Magna is a global, reputable, and customer-centric provider of parts and systems.

Opportunities Ahead

  • Magna has been immensely clear in its mission over the past few decades – it is on the forefront of the mobility transformation, keenly focusing on electrification and autonomy. In 2020, LG Electronics ("LG") and Magna teamed up to form a joint venture ("JV") called LG and Magna e-Powertrain JV. LG, as a leading electronics provider, makes for a great teammate that should help propel Magna into a leading position as an EV parts provider. Together, Magna and LG will manufacture e-motors, inverters, on-board chargers, and complete e-drive systems for select car manufacturers. Magna also produces the eBeam propulsion system, which presents a major growth opportunity for Magna as pick-up trucks are also undergoing electrification. Magna expects its electric powertrain business to expand from $2 billion in sales in 2023 to about $4 billion in 2027.

  • Streamlining internal operations and careful cost-cutting initiatives could help a company like Magna innovate better for customers. Magna has been investing into a few initiatives to cut down on unnecessary costs and dedicate these funds to where they matter most - maintaining (or improving) its global competitive position. Some of these investments include smart dyes, advanced and fenceless robotics, and data analytics. Each of these investments reduce costs and optimize operations. For example, advanced robotics will reduce floor space by 50%, result in 10-20% higher operating efficiency, and pump up production volumes. Similarly, Magna's data analytics investments have been paying off - it has optimized its paint colour change process, reducing waste and costs.

  • Magna has optionality outside of just core auto manufacturing. The mobility transformation is creating many opportunities in vertical markets with tons of optionality. Urban delivery, fleet monitoring, data, and autonomous driving are some of the areas that Magna's management is looking for collaboration and build-out opportunities. One innovation Magna introduced to the market was a LiDAR (i.e., Light Detection and Ranging) product that it manufactures in partnership with Innoviz, called the InnovizOne. The InnovizOne uses beams of light to measure distances from a car to help it map out and navigate its way on the streets. LiDARs are typically bulky and expensive, but Magna has created a smaller, more inexpensive model that could be perfect for mass-produced autonomous vehicles.

Risks

Cost Concentration

Magna is a fair bit concentrated in some markets, and we are not talking about sales. Almost half of Magna's plants are in North America, and its Canadian plants can only be found in the province of Ontario.

Magna North American ReachSource: magna.com

Ontario's economic outlook looks dire to some, who cite a high cost of living, skills shortages, and high input costs. Ontario has some of the highest industrial electricity rates in all of North America, making the region particularly expensive to operate in and make a healthy profit.

Similarly, Magna's customers in Ontario face the same risks. GM, Honda, and Ford are among some of the major global OEMs that manufacture vehicles in Ontario.

Rising costs to these manufacturers hurts demand for Magna's products and could force them to eventually move their operations away from Ontario.

In the latter scenario, there would be uncertainties around which auto part manufacturer would serve them best in the new locations they settle in.

Slow Market Growth

Light vehicle sales have experienced very little growth over the last two decades. Meanwhile, Magna is spending tons of money on expanding capacity and streamlining operations.

There is a risk that these investments improve Magna's margin profile, growth capacity, and market position, but ultimately do not help Magna as slow sales offset these efforts.

We also see a risk that growth in EV sales is simply offset by a drop-off in fuel-powered vehicles over the long run.

While EVs present a solid growth opportunity, EV sales could closely track the low-growth sales numbers similar to light vehicles today when it becomes a mature market.

highest industrial electricity rates in all of North America, making the region particularly expensive to operate in and make a healthy profit.

Similarly, Magna's customers in Ontario face the same risks. GM, Honda, and Ford are among some of the major global OEMs that manufacture vehicles in Ontario.

Rising costs to these manufacturers hurts demand for Magna’s products and could force them to eventually move their operations away from Ontario.

In the latter scenario, there would be uncertainties around which auto part manufacturer would serve them best in the new locations they settle in.

Cyclicality

As a heavy goods manufacturer, Magna is at the mercy of the global economy and geopolitical risks. In any recession, car sales drop and demand for car parts and systems closely follow.

Magna could experience whipsawing in its revenue and growth profiles if North America, Europe, or both experience recessions and general economic slowdowns.

Nascent EV Industry

Magna is making promising moves in the EV space, partnering with legitimate businesses to create great products.

However, the EV industry is still at a nascent stage in its growth story. With this comes loads of uncertainty.

Magna's relationships with these EV OEMs may not be the same as its traditional customers.

Also, technologies could quickly evolve and may expand at a pace that Magna cannot keep up with. A high-growth megatrend does not guarantee success for every player within it.

Magna must execute, but it also depends on EVs actually selling to end users based on expectations set out by the market.

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