LINAMAR CORP. $66(Toronto symbol LNR; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 64.8 million; Market cap: $4.3 billion; Price-to-sales ratio: 1.0; Dividend yield: 0.6%; TSINetwork Rating: Average; www.linamar.com) started up in 1966 with just a single machine shop in Guelph, Ontario.
The company now has 45 plants in North and South America, Europe and Asia that make a variety of automotive parts, including cylinder heads, cylinder blocks, camshafts, crankshafts and connecting rods.
The company gets around 80% of its revenue and 70% of its earnings by making engines, transmissions and other precision-machined parts for automakers. In 2013, General Motors, Ford, Chrysler and Caterpillar accounted for 59.4% of its revenue.
The remaining 20% of revenue and 30% of earnings mainly comes from self-propelled, scissortype elevating work platforms, which Linamar sells under the Skyjack name. It also makes other machinery, such as wind turbines.
Thanks to rising car sales following the recession, Linamar’s revenue soared 114.5%, from $1.7 billion in 2009 to $3.6 billion in 2013. It’s also benefiting as carmakers cut costs by outsourcing more of their production to trusted suppliers like Linamar.
As well, the company continues to profit from a major restructuring that included job cuts and plant closures. The resulting lower costs caused its earnings to soar from $0.02 a share (or a total of $1.1 million) in 2009 to $3.34 a share (or $216.1 million) in 2013.
Aims to double revenue in 10 years
Linamar recently pushed back its goal of increasing its annual revenue to $10 billion from 2020 to around 2024. That’s because it’s facing a shortage of qualified workers as well as higher plantconstruction and equipment costs.
Meanwhile, the company continues to acquire smaller firms that complement its existing plants, particularly outside of North America. (Overseas markets now supply 40% of its revenue.)
For example, it recently paid $45.7 million for Carolina Forge Company, which makes hot-forged products at a facility in North Carolina. This company’s expertise will improve the performance of Linamar’s gears, bearings and other metal parts.
In addition, the company recently agreed to buy the remaining 34% of Seissenschmidt AG after agreeing to purchase 66% of this firm in September 2014. Seissenschmidt makes hot-forged industrial parts at plants in Germany, Hungary and the U.S. Linamar didn’t say how much it is paying for this company, but it expects to complete the purchase in May 2015.
Owning 100% of this firm will make it easier for Linamar to integrate it with its existing plants. Seissenschmidt will also help improve the performance of Linamar’s main auto parts operations, with improvements like quieter transmissions with fewer vibrations.
Expanding in fast-growing markets
Meanwhile, the company continues to grow in China, where it opened a second plant in 2013 and is building a third. This will help Linamar profit as China expands its domestic auto industry. The company also expects to begin making gears in India in 2015.
In addition to acquisitions, Linamar fuels its growth by developing products for other machines, like off-road vehicles and farm equipment.
New products should contribute $400 million to revenue in 2014, and $500 million more in 2015. Linamar now plans to launch 179 new and upgraded products in the next few years that should add $3.3 billion to its revenue.
The company’s sound balance sheet will support its ongoing expansion. As of September 30, 2014, its long-term debt was $393.9 million, or a low 9% of its market cap. It also held cash of $115.2 million, or $1.78 a share.
Linamar’s strong reputation should continue to help it win new contracts, particularly as falling oil prices spur new car sales.
North American production will probably rise from 17.3 million vehicles in 2014 to 17.9 million in 2016, while European output will increase from 20.0 million to 21.0 million. Asian new car production will likely jump from 44.6 million to 48.7 million.
P/E still low after big rise
The stock has gained 58% in the past year, but it still trades at a reasonable 13.6 times the $4.86 a share that Linamar should earn in 2014. Its 2015 earnings could reach $5.51 a share, and the stock trades at just 12.0 times that forecast. The $0.40 dividend yields 0.6%.
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