Trade, taxes in focus for suppliers, analyst says
Higher auto production in all key regions points to a healthy round of earnings when Canada’s three auto suppliers start to report quarterly results on Feb. 24, but investors may be more interested in what the companies have to say.
With light vehicle sales in the U.S. coming in at a seasonally adjusted annual rate of 18.1 million in the fourth quarter, exceeding the pace of 17.4 million for the first nine months of 2016, investors remain concerned about the North American auto cycle hitting a peak.
However, RBC Capital Markets analyst Steve Arthur noted that these worries have subsided in recent months, as investors buy into a “stronger for longer” thesis.
Instead, uncertainty about trade and taxation in the U.S. has moved to the forefront, which is partly why Canadian suppliers have underperformed their U.S. peers since the end of Q3.
“We will look for commentary from each of the suppliers surrounding their cross border trade and the potential implications of a border adjusted tax in the U.S.,” Arthur told clients.
The analyst continues to prefer Magna International Inc. among the Canadian auto parts makers, highlighting its ongoing growth, discounted valuation, and the likelihood of a 10 per cent-plus dividend increase. He is forecasting a 7.3 per cent year-over-year revenue increase, with EBITDA up 14.4 per cent on operating leverage and operating performance.
Linamar Corp’s growth is expected to be driven by new business launches and contributions from M&A, although customer shutdowns during Q4 will likely cut into the gains.