Magna considering a major acquisition

Record sales generate ‘a lot of cash’ so buybacks, dividend hikes also possible

After reporting record TORONTO sales of $38.9 billion in 2017 and a net income of $556 million in the fourth quarter, Magna International Inc.’s chief executive said the auto parts maker is open to “a sizable acquisition” as it looks for further growth opportunities.

Canada’s largest auto parts maker reported US$10.39 billion in sales in the three-month period ending December 31, a jump of 12 per cent from the same time last year.

The increase was largely driven by an increase in light vehicle production of 5 per cent in Europe, while the company saw a decrease in North American light vehicle production of 5 per cent.

Magna’s chief executive Don Walker told analysts on a conference call Thursday the company is still looking at what the best opportunities are for growth.

“We are generating a lot of cash ... so we have the ability to do a sizable acquisition if it makes sense,” Walker said. “We have been tending to look at some of the new technologies that are out there, but we have the ability to do that and continue to look at opportunities in the areas that we think are key products for us going forward.”

Walker also said Magna, which is one of many automotive suppliers racing to develop autonomous technology, used its time at the Consumer Electronics Show last month “to continue to vet new potential partners, technology and startups.”

The company has expanded its global footprint over the last several years, including in China, where it sees opportunities to supply parts to both traditional players and new startups.

In the fourth quarter, Magna finalized a new joint venture with Hubei Aviation Precision Machinery Co. Ltd., a major Chinese seat supplier. The company also expanded its footprint in China with a joint venture agreement in October 2017 with Huayu Automotive Systems Co. Ltd to produce an electrified powertrain system for a German automaker.

Despite a softer North American market, Magna said its lower production in North America was “substantially offset” by the launch of new programs in the fourth quarter of 2016, the company said, including the Jeep Compass, Chevrolet Equinox, GMC Terrain, and Volkswagen Atlas, Ford Expedition and Lincoln Navigator.

Magna expects its 2018 sales total to reach between $39.3 billion and $41.5 billion, with light vehicle production hitting 17.4 million in North America and 22.4 million in Europe.

In a note to clients last month following Magna’s presentation at the Detroit International Auto Show, RBC Capital Markets analyst Steve Arthur said the company’s revenues should outpace the global auto industry growth.

“While growth in global auto production volumes is slowing, Magna continues to win new business which allows it to outgrow the market,” Arthur wrote.

“As Magna looks to reduce the excess cash held in the business, and moves to a modest leverage position, we expect it to deploy capital on further dividend increases, share buybacks and potentially additional accretive acquisitions.”

The company recorded a net reduction of $23 million in income tax expenses due to the changes to the U.S. federal corporate tax rate, amounting to a 6 cent increase in earnings per share in the fourth quarter.