Canada auto parts analyst cuts estimates

U.S. GM STRIKE

TORONTO • Canadian suppliers to General Motors

Co. are likely to report lower-than-expected profits as the strike by the United Auto Workers union enters its fourth week.

Bank of Nova Scotia analyst Mark Neville, who has street-high share price targets on Magna International Inc. and Linamar Corp., slashed his third-quarter profit estimates by about 5.5 per cent on Magna and Martinrea International Inc. in an Oct. 4 report.

“While the estimated sales impact is significantly less, we would expect to see high decremental margins on the lost sales as the companies, in our opinion, would be unable to fully adjust the cost base,” Neville said in the report. He had cut Linamar’s forecast by 20 per cent in an Oct. 2 report after the company issued a profit warning last week in part because of the strike.

Shares of Canada’s autoparts makers have slumped since the start of the U.S. strike last month: Linamar has dropped 13 per cent, Martinrea lost 12 per cent and Magna fell 6 per cent. General Motors slipped as much as 1.8 per cent Monday, extending its decline since the strike started to 11 per cent.

Negotiations between GM and UAW have “taken a turn for the worse” after the union made an offer on Saturday evening, a union official said. Talks between the UAW and GM resumed Monday morning.

The strike that took effect Sept. 16 has cut GM production by more than 8,000 vehicles a day, according to calculations by analysts at Credit Suisse and IHS Markit. The cost to the automaker has exceeded US$1 billion, with GM losing about US$82 million of potential profit in North America every day of the strike, JPMorgan analyst Ryan Brinkman wrote last week.

Scotiabank’s Neville cut Magna’s quarterly earnings per share estimate to US$1.40, with the average consensus at US$1.42, according to data compiled by Bloomberg. Martinrea’s forecast was reduced to 50 cents.

GM is Magna’s largest customer, making up about 15 per cent of its sales and it’s a “top customer” for Martinrea, Neville said. “While the strike is limited to U.S. workers/facilities, the impact has started to ripple through the North American supply chain,” he said.