Keep Those Cars a-Rollin

04/30/2013 9:45 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

As the global economy improves, the outlook for this Canadian auto parts company is excellent, says Gavin Graham of The Canada Report.

Linamar (LNR.TO) is the second largest auto parts company in Canada, after Magna International (MGA) Investors in Linamar will benefit from almost all of the features that make Magna attractive, without the dual share structure and corporate governance issues that have been an issue at the larger company.

The longer-term outlook for well-managed auto parts businesses is very compelling. The increase in the outsourcing of research and development and major components by the cash-strapped auto manufacturers—combined with the growth of auto sales in emerging markets—means that both their market share and the overall industry revenues will continue to grow.

The company specializes in precision engineered components, particularly those involved in the transmission and drive train for passenger vehicles and, latterly, commercial and off-road vehicles as well.

Linamar operated in 13 countries, including Canada, the US, Mexico, France, Germany, the UK, Hungary, China, Japan, and South Korea.

This is a strong company, with a proven ability to survive and profit in a highly cyclical industry. Linamar managed to remain profitable at an operating level during the most severe recession since World War II and even continued paying a dividend, although it prudently halved it from $0.06 a quarter in 2008 to $0.03 in 2009. Having restored it to its previous level in 2010, it announced a 25% increase to $0.08 last year ($0.32 per year).

The real attraction for Linamar is the outlook for the remainder of this decade.  Management has stated it believes the company’s revenues could reach $10 billion by 2020, four times the level in 2012. At the group’s annual general meeting last year, the company pointed out that simply retaining the present market share in auto parts and wind and construction equipment would allow Linamar to reach $7.5 billion in sales, or almost triple its present level.

Linamar has noted that the Canadian auto parts industry had been able to succeed despite the sharp fall in North American auto output and the strength of the Canadian dollar, which actually benefited Linamar as it purchases castings, forgings, and equipment in the US.

In the meantime, analysts expect North American auto sales to be higher this year as consumers finally get around to replacing their old gas guzzling cars in favor of newer, more fuel-efficient models. This is where Linamar’s expertise in improving the fuel consumption of engines and reducing their weight really contributes.

Linamar reported record sales of $3.22 billion for the year ended December 31, up 12.6% over the previous year (figures in Canadian dollars). Net earnings were up 36.7% to $144.9 million ($2.24 per share). Revenues in the Powertrain/Driveline segment, which makes transmissions and drive shafts, were up 3.2%, to $667 million in the fourth quarter of 2012. Revenues for the Industrial segment—which includes the Skyjack crane business—grew 25%, to $88.8 million.

If possible, buy on the TSX where the shares trade actively. If you use the Pink Sheets, place a limit order.

Linamar is a solid growth stock and the company is well-positioned to benefit from an improvement in the global economy. The shares are off their January high of C$26.96
and have a trailing price/earnings ratio of 11.1. The forward p/e is a very reasonable 7.9.

Linamar is a buy for investors willing to undergo some volatility due to macroeconomic concerns.

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