Shares of consumer cyclical companies have been performing well this year because an improving job market is driving an increase in consumers’ discretionary spending. The Federal Reserve’s loose monetary policy is also driving the growth of consumer cyclical companies.
Among other cyclical industries, automotive is seeing rising demand based on people’s improved ability to afford automobiles with employment levels improving. While the industry has been suffering from lowered production due to a global semiconductor chip shortage, increasing government and private investments to address the shortage should help automotive companies generate solid growth in the coming quarters.
Given this backdrop, Goldman Sachs has recently upgraded auto parts companies Magna International, Inc. (MGA) and Lear Corporation (LEA) to ‘Buy.’ And we think these companies’ potential to capitalize on the industry's tailwinds makes them ideal investment bets now.
Magna International, Inc. (MGA)
MGA is a Canada-based mobility technology company that develops, manufactures, engineers, supplies and sells automotive products worldwide. The company offers body exteriors, chassis structures, transmissions, lighting, seating, and fuel systems. Goldman Sachs has upgraded MGA’s rating from ‘Neutral’ to ‘Buy.’
On June 07, 2021, MGA introduced its new innovative Surface Element Lighting technology that offers a new palette of options for automotive designers. First-to-market with its all-electric 2021 Volkswagen ID.4, MGA’s Surface Element Lighting is contained within a compact package, providing a homogeneous appearance and customizable, affordable LED lighting options for exterior vehicle applications. This new technology is likely to create high demand among automotive designers.
After reaching a production milestone of 100,000 eDrive gearboxes in a joint venture with Jiangling Motors Co. Ltd., MGA won additional business for eDrive technologies with Chinese EV start-ups on April 19. These gearboxes are used in various, popular car models of Chinese automakers owing to their high efficiency and best-in-class power density. During its fiscal first quarter, ended March 31, MGA’s sales increased 17.6% year-over-year to $10.18 billion. The company’s income from operations was t $805 million, up 108.5% from the prior-year period. MGA’s adjusted net income increased 116.8% year-over-year to $566 million. Its adjusted EPS increased 116.3% year-over-year to $1.86. The company had $3.46 billion in cash and cash equivalents as of March 31, 2021.
MGA surpassed the Street’s EPS estimates in three of the trailing four quarters. A $10.20 billion consensus revenue estimate for the current quarter represents a 11.8% rise from the prior-year period. The stock’s EPS is expected to grow at a 39.4% rate over the next five years. MGA has climbed 108% over the past year and 102.5% over the past nine months. It closed yesterday’s trading session at $92.64.
MGA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which translates to Strong Buy in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has an B grade for Momentum, Growth, Sentiment, and Quality. To see additional POWR Ratings for MGA’s Value and Stability, click here. MGA is ranked #7 of 65 stocks in the A-rated Auto Parts industry.
Lear Corporation (LEA)
LEA supplies seating, electrical distribution systems, electronic modules, related subsystems, components and software to automotive manufacturers worldwide. The company operates through two segments primarily—Seating and E-Systems. Goldman Sachs has upgraded LEA’s rating from ‘Neutral’ to ‘Buy.’ LEA is based in Southfield, Michigan.
On March 25, 2021, LEA acquired M&N Plastics, an injection molding specialist and manufacturer of engineered plastic components for automotive electrical distribution applications. The acquisition should further support LEA’s vertical integration capabilities in engineering and producing complex parts for electrical distribution, including high-voltage wire harnesses and power electronics.
On January 14, LEA’s car connection software Xevo, and Cerence Inc. (CRNC), a software development company, formed a strategic collaboration to deliver Cerence Pay conversational AI-powered contactless payment capabilities into vehicles via the Xevo Market commerce and services platform. Drivers will be able to use their voice to place orders from popular brands and authorize payments using an in-vehicle touchscreen while on the road.
LEA’s sales came in at $5.35 billion for its fiscal first quarter, ended March 31, 2021, which represents a 20.1% improvement year-over-year. The company’s adjusted core operating earnings have been reported at $336.20 million, up 64.1% from the prior-year period. While its adjusted net income increased 82% year-over-year to $225.90 million, its adjusted EPS increased 82% year-over-year to $3.73. The company had $1.38 billion in cash and cash equivalents as of March 31, 2021.
Analysts expect LEA’s revenue to improve 5.7% year-over-year for the current quarter, ending September 30, 2021, to $5.18 billion. It surpassed the Street’s EPS estimates in three of the trailing four quarters. LEA has gained 60.9% over the past year and 60.7% over the past nine months. It closed yesterday’s trading session at $175.28.
LEA’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which translates to Buy in our proprietary ratings system.
The stock has a B grade for Value and Momentum. We have also graded LEA for Growth, Stability, Sentiment, and Quality. Click here to access all LEA’s ratings. LEA is ranked #36 in the Auto Parts industry.
MGA shares were trading at $94.26 per share on Thursday afternoon, up $1.62 (+1.75%). Year-to-date, MGA has gained 33.14%, versus a 15.69% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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