Magna Worldwide Inc. (TSX:MG) has taken a fairly large hit lately. With issues coming from many alternative instructions, it’s truly stunning to me that Magna inventory has held above $70.

It’s fairly clear that the auto trade is in disarray, however is Magna’s inventory worth low cost sufficient to consider shopping for it as a price play?

Macroeconomic headwinds are taking Magna inventory down

Prefer it or not, the world has dramatically modified. It’s not easy-going for corporations like Magna. In truth, the times of booming auto gross sales and robust margins look like a distant reminiscence, with little hope of restoration anytime quickly.

One of many main macroeconomic modifications that’s hitting Magna Worldwide inventory is rising rates of interest. Increased rates of interest imply a better value of borrowing to buy a automobile. This takes its toll. Simply as low borrowing prices (rates of interest) boosted auto gross sales for thus a few years, at this time, larger rates of interest are hitting auto gross sales. For instance, simply 5 years in the past, I purchased a brand new automobile, which I used to be in a position to get 0% financing on. Immediately, auto financing charges will be as excessive as 6%. This makes an enormous distinction in affordability. Increased rates of interest will proceed to negatively affect auto gross sales.

In Magna’s newest quarter, gross sales elevated 5% to $9.6 billion. Though one can say that it might be worse, this compares to gross sales will increase that had been effectively above 15% 10 years in the past. It’s fairly clear that rising rates of interest are taking a chew out of gross sales.

Value inflation hitting Magna Worldwide inventory

Transferring on from the adverse impact that rising rates of interest are having on Magna, let’s contemplate inflation. Value inflation is one other huge subject that Magna is coping with proper now. In truth, in response to the corporate, enter value inflation is at ranges not seen in many years. This has manifested within the firm’s margins. Its earnings earlier than curiosity and taxes (EBIT) margin got here in at 3.7% in This autumn 2022 versus 5.6% in the identical interval final 12 months.

This decline is sort of dramatic and emblematic of an enormous downside. Provide chain disruptions had been a significant downside in 2022, vitality value inflation was huge, and semiconductor chip shortages continued to negatively affect manufacturing. This led to very risky manufacturing schedules, which led to huge inefficiencies at lots of Magna’s services.

These value pressures are anticipated to proceed into 2023 and in my opinion, it’ll take a while to rebalance and stabilize. In truth, one of many methods during which this will probably be rectified is that if and when costs start to extra adequately replicate Magna’s new value setting. However then, the vicious cycle continues and demand destruction will escalate as costs rise.

Excessive capital depth as Magna invests in development

The final bit value mentioning right here is Magna’s free money stream technology. At all times an environment friendly operator producing a great deal of free money stream, a few of us who’ve adopted this firm for years may need bother recognizing it at this time.

Magna’s This autumn 2022 free money stream declined 53% to $340 million. This was pushed by the aforementioned pressures in addition to Magna’s investments into its long-term development profile. For instance, Magna is investing in new improvements to place itself within the new world of zero carbon automobiles.

A distinct world

For a very long time, we had been used to seeing spectacular financials from Magna – robust money flows, a strong steadiness sheet, robust margins and efficiencies. This isn’t the case anymore; the final word signal that instances are altering. The auto enterprise is cyclical one. And clearly, the cycle has turned. This takes years to play out, and so Magna will take years to work its means out of this downcycle.

In closing, Magna is within the throes of a cyclical downturn pushed by rising rates of interest and price inflation. Buying and selling at 11 instances this 12 months’s anticipated earnings, Magna’s inventory worth is nowhere close to attractively valued presently. That is true particularly contemplating that I consider that Magna’s earnings estimates have important draw back threat.