When it comes to the Apple Car, it's hard to separate fact from fiction (the company hasn't even officially said it's working on an automobile). But two recent reports suggest Apple (AAPL) - Get Apple Inc. (AAPL) Report is hitting the gas on its move into the auto market, and one undervalued stock is at the center of the action.
That company is Canada's Magna International (MGA) - Get Magna International Inc. Report , which supplies everything from chassis to electronics to carmakers like BMW, Ford, General Motors and Fiat Chrysler.
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What separates Magna from other component makers is its Magna Steyr division, which assembles entire vehicles under contract.
Last week, German newspaper Handelsblattreported that talks had broken off between Apple and both Daimler and BMW to produce the Apple Car, leaving Magna Steyr as the main contender. The news came after another German publication, Frankfurter Allgemeine,said Apple has a secret car lab in Berlin. If true, that puts it in more or less the same neighborhood as Magna Steyr's Vienna factory.
This isn't the first time Magna Steyr has been linked to Apple and other leading tech stocks. In a note quoted in a May 6, 2015, Wall Street Journalarticle, Morgan Stanley analyst Ravi Shanker wrote:
"As one of the only outsourced design, engineering and assembly operations in the world, Magna Steyr is in a unique position to help Apple, Google, Uber and others who may want to 'make' their own cars (but don't want to get their hands really dirty) come to market quickly-thus playing a similar role to what Foxconn does today for Apple in the smartphone industry."
Founded in 1957 and headquartered in Aurora, Ontario, Magna boasts a $17-billion market capitalization and operations in 29 countries.
The company has been riding the wider automotive rebound. Its fourth-quarter revenue slipped 3%, to $8.56 billion, but rose 6% from a year earlier excluding currency rates (Magna reports in U.S. dollars but does plenty of business in euros and Canadian dollars, and the greenback gained against those currencies).
Earnings-per-share (EPS) from continuing operations came in at $1.19, compared to $1.23 a year ago, but that still topped expectations and let management hike the quarterly dividend 14% to $0.25 a share.
Speaking of dividends, Magna is known for its shareholder friendliness: In addition to its quarterly payout, which has doubled in the past five years and yields 2.3%, the company continues to buy back shares, to the tune of 10.6 million in 2015, at a cost of $515 million.
This year, Magna expects overall North American vehicle production to rise to 18 million units from 17.5 million in 2015, while European production remains flat. The company forecasts revenue of $34.6 billion to $36.3 billion, up about 8% to 13% from its 2015 total.
The auto-parts business is highly cyclical, and complete vehicle assembly accounts for just 7% of Magna's revenue, so any bump from the Apple Car, which isn't expected to hit the market until 2019, would be muted, at least at first. However, low interest rates, cheap gas and a firming U.S. job market should keep fueling the auto industry's growth.
Magna's first-quarter results are due out May 4, and analysts expect EPS of $1.19, up 8% from a year ago. Meantime, the stock's forward price-to-earnings ratio clocks in at 7.4, a discount to competitors like Johnson Controls, at 9.8, and Lear Corp., at 12.1. Analysts' average 12-month price target on Magna is $60, suggesting plenty of upside from the current level of around $43.
With a bargain valuation, a rising dividend and more growth ahead, there's a lot to like about Magna International, with or without the Apple Car.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.