Although fears about “Trump” tariffs helped lower this stock’s share price, the new North American trade pact brightens its long-term prospects.
In addition to the advantages it should gain with the NAFTA replacement deal, the company stands to benefit from its wide customer base in different countries. That includes a 2018 acquisition that is expanding its operations in agricultural equipment and pushing up sales and earnings. In the meantime, the stock trades at less than 5 times the company’s forecast earnings.
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LINAMAR CORP. (Toronto symbol LNR; www.linamar.com) makes a variety of automotive parts, including cylinder heads, cylinder blocks, camshafts, crankshafts and connecting rods. It also makes self-propelled, scissor-type work platforms under the Skyjack brand as well as a variety of other machinery for industrial clients.
Recently, General Motors (New York symbol GM) announced that it will close five of its North American auto assembly plants by the end of 2019. Those include the plant in Oshawa, Ontario.
However, Linamar expects those closures will have little impact on its revenue and earnings. The company supplies powertrain platforms to several GM plants in the U.S., most of which are not part of the restructuring plan.
To cut its exposure to automakers, Linamar acquired the MacDon Group of Companies for $1.2 billion in February 2018. Based in Winnipeg, that firm makes agricultural harvesting equipment. Linamar will merge those operations with its agricultural business in Hungary.
Due to that acquisition, overall sales in the three months ended September 30, 2018, rose 18.6%, to $1.84 billion from $1.55 billion a year earlier.
Sales for Linamar’s transportation business (74% of the total) rose 4.9%. That’s mainly due to higher demand for light-vehicle parts from automakers in North America and Asia. Favourable currency exchange rates also contributed to that gain.
Value Stocks: Industrial equipment sales soar thanks to the MacDon acquisition
Linamar’s industrial equipment sales (26%) soared 86.2% in the latest quarter due to the MacDon acquisition as well as higher demand for equipment in North America and Europe.
Linamar’s earnings in the quarter improved 5.5%, to $113.2 million, or $1.71 a share. However, that missed the consensus estimate of $1.85 a share. A year earlier, it earned $107.3 million, or $1.62.
The company borrowed the cash it needed for the MacDon acquisition. Its long-term debt of $2.46 billion (as of September 30, 2018) is a high 84% of its market cap. It also holds cash of $424.5 million.
The stock is down 40% from its recent peak of $75 in May 2018. That’s mainly due to concerns over the impact existing U.S. tariffs on imported steel and aluminum will have.
However, the new trade agreement between the U.S., Mexico and Canada is a long-term positive for Linamar, as it operates in all three countries. The USMCA will also limit imports of cheaper auto parts from China and other low-wage countries. In particular, the new deal lets Canada send 2.6 million passenger cars to the U.S. annually compared to the current rate of 1.7 million.
The company will likely earn $9.37 a share for all of 2018, and the stock trades at just 4.7 times that forecast. Linamar pays a quarterly dividend of $0.12. The annual rate of $0.48 yields 1.0%.
Recommendation in The Successful Investor: Linamar is a buy.
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