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LINAMAR CORP. (Toronto symbol LNR; www.linamar.com) survived the 2008 financial crisis, plus the bankruptcies of GM and Chrysler. The company has emerged stronger than ever, and we’ve now upgraded its TSINetwork Rating from “Extra Risk” to “Average.” (See below for a description of how we award our TSINetwork ratings.)

Linamar gets around 80% of its revenue by making engines, transmissions and other precision-machined parts for automakers. It has 44 plants in North America, Europe and Asia.

The remaining 20% of Linamar’s revenue mainly comes from self-propelled, scissor-type elevating work platforms, which it sells under the Skyjack name. The company also makes other industrial machinery, such as parts for wind farms.

Thanks to strong car demand after the recession, Linamar’s revenue jumped 114.5%, from $1.7 billion in 2009 to $3.6 billion in 2013. In addition, automakers are cutting their own costs by outsourcing more production to suppliers like Linamar.

The recession also prompted Linamar to cut jobs and close some plants. 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.

A big part of Linamar’s recent growth has come from acquisitions it has made outside North America. Overseas markets now supply 30% of its revenue.

For example, in 2011 Linamar paid $30.1 million for three plants in France that make cylinder heads, engine blocks, gears and other parts for large engines and transmissions. Last year, the company paid $25.4 million for three German plants that make camshafts for various carmakers.

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Canadian stocks: Two new plants in China latest phase in aggressive expansion plan

Meanwhile, Linamar is aggressively expanding in Asia. The company is now building two plants in China, which will bring its total in that country to three. It has also leased a facility in India that should start making gears in 2015.

These new operations should help Linamar reach its goal of increasing its annual revenue to over $10 billion by 2020.

Linamar’s strong balance sheet will support its expansion plans. As of March 31, 2014, its long-term debt was $489.6 million, or a low 12% of its market cap. It also held cash of $144.5 million, or $2.23 a share.

The stock has more than doubled in the past year and now trades at 15.0 times Linamar’s projected 2014 earnings of $4.27 a share. That’s a high p/e ratio for a cyclical auto parts maker, but it’s still reasonable in light of Linamar’s strong international growth prospects. The $0.40 dividend yields 0.6%.

Linamar is a buy recommendation of Pat McKeough’s flagship advisory, The Successful Investor.

Our TSI Network Ratings

We award our ratings on a point system, using nine key factors that determine a company’s ability to survive a business setback and go on to greater success when conditions improve. These factors are:

• One point for a long-term record of profit.
• One point for a long-term record of dividends.
• One point for industry prominence—two points for industry dominance.
• One point for an attractive balance sheet, with adequate equity and manageable debt.
• One point for Canada-wide operations, or two points for multinational operations.
• One point for being able to serve all shareholders. To merit this point, firms must be free of excess government regulation, free of too much dependence on a single supplier and free of the influence of a parent company or from insider abuses.
• One point for freedom from business cycles.
• One point for the ability to profit from a secular trend, or two points for the ability to profit from two or more secular trends. Secular trends (such as global economic liberalization) go far beyond mere business cycles; they reflect ongoing changes in society.
• One point for offering products or services that profit from habitual behaviour.

Companies with 11 or 12 points fall into the top category: Highest Quality. Those with eight to 10 points are of Above Average quality. Six or seven points means they are of Average quality; four or five points, Extra Risk; two to three points, Speculative; one or no points, Start-up.

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