Financial Statement Analysis Group 17

Magna
International
HOLD: NYSE:MGA

Target Price 63.45USD

Price (10/12/20) 62.40USD

Stock Data
Market cap 18.68B
PE Ratio 42.02
Div Yield 2.56%
52-wk High 64.61
52.wk Low 22.75

Prepared by

1800092838 1800092858 1800092858

Lauren Ho Clelie Zhou Artur Grzenkowicz
Table of Contents
1. Company Overview 1
1.1 History and Development 1
1.1.1 Brief Introduction 1
1.1.2 Company History 1
1.2 Business Model and Products 3
1.2.1 Business Model Analysis 3
1.2.2 Market Position 3
1.3 Competitive Advantages 5
1.3.1 Diversified Strategy and Full Product Capabilities 5
1.3.2 Entrepreneurial and People-First Culture 5
1.3.3 Investment in Research and Development 5
1.4 Risk Factors 5
1.4.1 Intellectual Property Protections 5
1.4.2 Customer Concentration 6
1.4.3 Customer Pricing Pressure 6
2. Industry Overview 7
2.1 Macroeconomic Factors 7
2.1.1 Opportunities for Innovation in Sustainability 7
2.1.2 Global Economic Uncertainty 7
2.2 Disruptive trends in the automotive industry 7
2.2.1 Electrification 7
2.2.2 Autonomous vehicles 7
2.2.3 Smart mobility 8
2.3 Key Success Factors 8
2.3.1 Price Competitiveness 8
2.3.2 Frequent Innovation and Research 8
2.3.3 Favorable Client and Supplier Relations 8
3. Balance Sheet Analysis 9
3.1 Asset Structure 9
3.2 Debt-Paying Ability 9
3.2.1 Short-term Liquidity 9
3.2.2 Long-term Solvency 10
3.3 Cross-time Comparison and Common-Size Analysis 10
3.3.1 Working Capital and Liabilities 10
3.3.2 Assets 11
3.3.3 Liabilities 11
3.4 Hidden Assets and Liabilities 12
3.4.1 Hidden Assets 12
3.4.2 Hidden Liabilities 13
4. Income Statement Analysis 15
4.1 Cross-time Comparison and Common-Size Analysis 15
4.2 Revenue and Cost Segment Analysis 15
4.2.1 Segment Analysis by Geography 15
4.2.2 Segment Analysis by Product 16
4.3 Costs of Goods Sold Analysis 16
4.3 Business Model Analysis 17
4.3.1 Business Model Analysis 17
4.3.2 Life Cycle and Profitability 19
5. Statements of Cash Flow Analysis 20
5.1 Cash Flow Structure 20
6. Profitability Analysis 21
6.1 DuPont Summary 21
6.2 Profit Margin Analysis 21
6.2.1 EBITDA Margin 21
6.2.2 Net Profit and Expenses Analysis 22
 6.3 Asset Turnover Analysis 22
6.3.1 Total Asset Turnover 22
6.3.2 Accounts Receivable Turnover 23
6.3.3 Inventory Turnover 23
6.3.4 Fixed Assets Turnover 24
6.4 Equity Multiplier 25
7. Forecasting 26
7.1 Revenue Forecasting 26
7.1.1 Core Assumptions 26
7.1 Gross Margin and Expenses Forecast 26
7.1.2 Core Assumptions 26
8. Earnings Management Analysis 27
8.1 Revenue Growth 27
8.2 Accounts Receivable Growth 27
8.3 Major Expense Accounting 28
8.4 Related Party Transactions 29
9. Valuation 30
9.1 Discounted Cash Flows 30
9.2 Residual Income Model 30
9.3 Conclusion 31
Appendix i
1. Company Overview
Magna International (NYSE: MGA; Magna) is the leading global mobility technology
company based in Canada that’s committed to being on the forefront of automobile
innovations. They pride themselves on their expertise spanning the entire vehicle, from
body and chassis to engineering and manufacturing, as well as their longstanding
history as an industry leader in the automobile business. Their quality-focused
approach to manufacturing is complimented by their focus on sustainability and ability
to quickly spot emerging trends. Alongside the numerous opportunities in the
automobile industry like autonomous driving, smart transit, and more, Magna’s
innovations and sales have translated into successful financial performance
throughout the years.

1.1 History and Development

1.1.1 Brief Introduction
Magna International (Magna) is a Canadian mobility company that is committed to
being on the forefront of the automobile innovations. It was founded in 1957 and was
listed on the Toronto Stock Exchange under the symbol MG in 1962. The company
was recognised as a publicly traded corporation by the New York Stock Exchange in
1992 as MGA. They produce complete vehicle engineering, as well as automobile parts
such as the body, the exterior, mechatronics and lighting. Magna is a multinational
corporation operating in 27 countries.

1.1.2 Company History

Securing Market
Setting the Foundation Global Expansion
Position

Stage 1: 1957-1977 Stage 2: 1978-1995 Stage 3: 1996-Now

1957: Foundation
1959: First contract,
with General Motors
1962: Listed on TSX
Technological innovations European acquisitions
Geographic expansion Largest auto parts supplier
1992: Listed on NYSE in NA
Enters EV and AV market
Receives global recognition
and awards

Figure 1. Magna International’s Chronology

• Setting the Foundation

In 1957, Frank Stronach started Multimatic, a one-man tool and die shop, in Toronto.
The company received its first part contract with General Motors in 1959. Five years
after the creation of the company, Magna Electronics Corporation Limited (MG) made
its initial public offering on the Toronto Stock Exchange in 1962.

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 • Securing a Market Position
In 1965, the Auto Pact between Canada and the US removes tariffs on automobiles
and automotive parts. This allowed Multimatic to trade with the US and US companies
such as Ford.

In 1969, Mutlimanic merges with Magna Eletronics Corporation Ltd. and continues
operating under the new name. The company exceeded $ 1 million US in annual sales
during the 1960s.

In the course of the 1970s, Magna grew steadily, opening new plants in the US and
Canada. It also diversified its products, developing key innovations for the automobile
industry. The company multiplied its annual sales by 100 during this decade.
The firm changed its name to Magna International Inc. in 1973.

Magna continued in the same direction in the 1980s, further diversifying its offerings.
It also started investing more in its employees, opening an industrial campus and an
employee park. It also committed to the Corporate Constitution, to share its profits with
its employees, shareholders and its management. The Employee’s Charter was also
adopted in line with its previous engagements.

The 1990s were a decade of geographic expansion and innovation for the firm. Magna
opened facilities in Mexico and acquired several European automotive systems
suppliers in order to penetrate the local markets.

Magna started being traded at the New York Stock Exchange in 1992.

• Global Expansion
In 1997, Magna signed one of the largest industry contracts ever made. The firm
supplied Cosma with subframes for pickups and sport utility vehicles. In parallel to this,
Magna pursued its M&A strategy into the new millennium, further expanding its
portfolio with companies such as Steyr-Daimler-Puch, while restructuring the group by
separating its other non-automotive businesses.

Magna receives global recognition as a leader of the global auto parts industry from
Forbes magazine, as well as longstanding clients.To stay competitive and relevant,
Magna consistently invests in R&D and explores the future of the automobile industry.
It announced the development of an electric vehicle and the partnership with Lyft for a
fully self-driving car system. The company also explores the future geographic markets,
entering the booming Chinese market through a joint venture with its local branches
and sustaining a certain presence despite the numerous domestic competitors.

Since its foundation in 1957, Magna was able to sustain a dynamic growth, regularly
reaching milestones and it is now pursuing a different growth strategy based on key
M&As that will benefit both its portfolio and its R&D and production operations. Thanks
to its careful strategy planning, Magna has been the largest auto parts supplier in North
America on the basis of sales, since 2006.

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1.2 Business Model and Products
1.2.1 Business Model Analysis
Magna International is a manufacturing company producing auto parts for major
automobile makers worldwide. Its business model is described in the business model
canvas in Exhibit 2 here below.

The company generates revenue mainly from selling the goods produced. To do so, it
relies on its key resources, namely its engineers, employees, patents and licenses to
develop and protect its expertise in the field. As the market is very competitive, it is
essential for Magna to differentiate itself from its rivals with edge-cutting innovations.
In order to offer a meaningful value proposition, Magna relies on its various partners in
the supply chain, such as raw material suppliers.

Magna is able to benefit from economies of scale thanks to its size and the scale of its
operations. It also benefits from economies of scope to a certain extent, as the
innovations made can often be applied to several automobile models, brands and
categories. However, as original equipment manufacturers may want or need parts
specific to their own products, the economies of scope may not always apply.

Key Partners Key Activities Value Customer Customer Segments

- Raw material - Manufacturing Propositions Relationships Mass Market:
suppliers Automobile parts Developing and Contracts with - Original
- Spare part - R&D producing automobile industry Equipment Makers
suppliers innovative and leaders. Trust through (eg. Toyota, Ford,
- Machinery high quality long-term relationships Zhonghua
suppliers automobile parts and experience in the - Tier 1 companies
- Maintenance for today and industry. (eg. Samsung,
services tomorrow’s Harbin Hafei)
- Shipping Key Resources vehicles. Channels - Medium and
company - Machinery & Plants Traditional distribution Heavy trucks
- Consulting - Land channels for (Volvo Truck,
firm - Employees manufactured goods PACCAR)
- Auditing firm - Expertise makers. and,
- Energy Firm - Brand & reputation - Other non-
- Contracts automotive firms
- Patents & Licenses (eg. BRP,
- Subsidiaries Caterpillar)

Cost Structure Revenue Streams

Value-drive company, with in-house production and profit focus Sales of manufactured goods
In 2019, Magna paid $2.82B USD in direct labour and COGS
totalled $34.02B USD while SG&A expenses were $1.35B USD.
Magna benefits from both economiese of scale and scope.

Figure 2. Magna’s Business Model Canvas

1.2.2 Market Position

Magna International has been one of the global market leaders in the auto parts
industry for decades. The company has steadily increased its sales and revenues from
its foundation in 1957. Fifty years later, Magna became a global leader, with $ 39.43
billion dollars US in 2019 from $ 1.4 billion dollars US in the 1990s. This noteworthy
increase was organic as the firm did not have any specific period of extraordinary
growth, but rather a consistent progress over time. Since 2011, the firm’s total assets
increased by $11.11 billion dollars US to $25.79 billion dollars US in 2019. In particular,

3
Magna is the largest auto parts supplier in North America on the basis of sales at $
16.353 billion USD in 2018 (Figure 3).

Magna International has been working regularly with global automobile leaders such
as Toyota, Ford, Tata Motors and BMW. It has also been in a longstanding relationship
with General Motors, which was Magna’s first contract in 1959. More recent partners
include Lyft and BAIC.

Magna’s reputation and expertise in the industry are frequently recognized and
rewarded by its customers and magazines such as Forbes.

18 16.353
16 14.4
14 12.42 11.564
12 10.76
10
8
Figure 3. Auto 6
4
Parts Suppliers in 2
North America by 0
Sales 2018 Magna Robert Bosch ZF North Continental Denso
international America Automotive International
Source: Annual Report,
Systems US America
Magna International, Bosch,
ZF, Continental, Denso

Magna’s main revenue source is the Body Exteriors & Structures segment, generating
41.74% of the sales in 2019 (Figure 4). On the other hand, the Corporate and Other
segment accounted for a loss of 1.58% of the sales. This was due to higher labor and
benefit costs, higher spending associated with corporate R&D, an increase in expected
costs payable related to divestiture, and higher sponsorship costs.

-2%
Body Exteriors &
14% Structures
Power & Vision
40%
16% Complete Vehicles

Figure 4. Business
Seating Systems
Segments by
Sales 2019 Corporate and Other
28%
Source: Annual Report,
Magna International

Magna International owns 346 manufacturing and assembly facilities all over the world.
Despite being a Canadian company, its European and Chinese production facilities
each produced more than the North American ones. In 2019, 24,758 light vehicles, i.e.
39.4% of the company’s light vehicle production, were manufactured in China. Magna
has been investing heavily in China, especially in recent years. The Chinese engineers,
labor force and technology are on the forefront of the global stage. Figure 5 shows that
the Chinese production facilities rapidly took over since they were introduced in 2017.

4
 100
90
80
70
60
50
40
30
Figure 5. Magna’s
20
Global Production
10
of Light Vehicles
0
2011-2019 2019 2018 2017 2016 2015 2014 2013 2012 2011

Source: Annual Report, North America Europe China

Magna International

1.3 Competitive Advantages

1.3.1 Diversified Strategy and Full Product Capabilities
Magna is one of very few auto-manufacturing companies with a strategy that includes
complete vehicle engineering and contract manufacturing expertise. They have
complete vehicle assembly capability and electronic and software capabilities across
many areas, making switching costs for existing customers very high.

1.3.2 Entrepreneurial and People-First Culture

The company understands the value of a motivated and entrepreneurial workforce.
Magna gives managers and workers at each plant the autonomy to make their own
decisions, promoting continuous improvement and cultural flexibility. Through
initiatives like the ‘Winning Innovations Network’, a network available to all employees
for idea submissions and collaborative problem solving, Magna effectively taps into the
brain power of their labour force for technological development. Financially, Magna
includes a profit-sharing program as part of employee compensation.

1.3.3 Investment in Research and Development

The Magna Corporate Constitution stipulates that 7% of their pre-tax profits for any
financial year must be allocated to research and development. Those funds are
focused into key strategic areas: lightweighting, electrification, autonomy, and smart
mobility, where they aim to reach and maintain a leadership position. While they do not
publish patent or innovation numbers, their strategic research partnerships with
companies like Lyft for ADAS systems or aggressive acquisitions to establish new
research specialties are indicative of their innovation outlook and strength in research
and development. Just their seating business includes 6 R&D centres — an indication
of the scale of their research capabilities.

1.4 Risk Factors

1.4.1 Intellectual Property Protections
In an industry where constant innovation is paramount, Magna is greatly susceptible
to intellectual property theft as they have discovered through the quotation process

5
with OEMs. Quotations often include detailed descriptions of parts to be manufactured,
and as these requests are shared among auto-part suppliers, Magna has often
identified other companies infringing on their own IP. Pressure from OEMs sometimes
force Magna to license its technology to its competitors as a way to promote
competition for individual parts. Magna would be threatened with a loss of contract if
they did not comply but might also be granted less than 50% of the contract.

1.4.2 Customer Concentration

Despite supplying parts to all leading OEMs, over 75% of sales are concentrated within
six customers: GM, BMW, Ford, Fiat Chrysler, Daimler, and Volkswagon. Not only are
they geographically concentrated between Detroit and Germany, any macro factors
affecting the sales of these six companies have the potential to significantly disrupt
Magna’s sales. As they also make up a large part of Magna’s portfolio, they also have
greater leverage over them than when compared to Magna’s competitors.

General Motors
15%
23%
BMW

Ford
14%

10% Fiat Chrysler

Automobiles
Figure 6. External
Revenue by 13% Daimler AG
Customer 2019 12%
Volkswagen
13%
Source: Annual Report,
Magna International

1.4.3 Customer Pricing Pressure

Given the highly competitive nature of the automobile industry, Magna is susceptible
to pricing pressure from OEMs. Long-term contracts have mutually agreed price
reductions over the course of the agreement, meaning Magna must constantly looking
for ways to lower inventory costs to maintain margins. As OEMs have great purchasing
power, they also possess significant leverage over their suppliers and can pressure
them to absorb inflation, product design, and innovation costs.

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2. Industry Overview

2.1 Macroeconomic Factors

2.1.1 Opportunities for Innovation in Sustainability
The global, consumer-led, automotive trend towards sustainability is unmistakable and
electric vehicle companies like Tesla and Nikola have been reaping the benefits. The
demand for vehicles that are less taxing on the environment is high and there are
significant economic benefits for companies that are able to innovate in this area, both
from consumers and OEMs. This demand extends to a demand for sustainability
across the value-chain, from sales to advertising and vehicle usage, all of which will
force automotive companies to rethink their sustainability strategies.

2.1.2 Global Economic Uncertainty

With the increased globalisation of the automobile industry, it becomes more
susceptible to geopolitical dynamics — most notably, the U.S.-China trade war where
trade and tariff disputes have great potential to throw business off-course. COVID-19
too has impacted global and regional economic growth of the entire industry. The
impact of the epidemic on consumer confidence, workforce, and supply chains have
yet to be fully revealed.

2.2 Disruptive trends in the automotive industry

From electrification, autonomous vehicles to smart mobility, there are many
opportunities to innovate and develop capabilities in emerging technologies. Safety,
sustainability, and cost-saving innovations have become hot topics for research and
development as the rise of new technologies, policies, and changing consumer
preferences force drastic industry disruption. While there is a consensus that the
industry is ripe for disruption, there is no agreement on what the industry will look like
in the future given how quickly automotive trends transform. Each industry player, with
every innovation, has the potential to significantly affect the coming years. Companies
in this space must stay agile and be able to predict coming trends.

2.2.1 Electrification
The electrification is one of the major disruptive trends in the automotive industry.
Governments try to reach Paris Agreement’s CO2 emissions quota and diminish their
reliance on oil imports. To reach these goals, authorities use subsidies, tax incentives,
legislation and other forms of non-monetary and monetary support. Increasing
environmental awareness of consumers plays a vital role as well. The growth of the
EV market has paused in 2020 due to global fall in demand for light vehicles, but the
market is expected to grow again in the future, with EU and China promising to commit
even harder to solving the environmental issue.

2.2.2 Autonomous vehicles

The global autonomous vehicle market is expected to be valued at $54.23 billion in
2019, and is projected to reach $556.67 billion by 2026, registering a CAGR of 39.47%
from 2019 to 2026. Furthermore, key players in that market include most of Magna

7
International’s biggest clients, making that trend especially impactful for Magna’s
bottom line.

The promise of eliminating accidents caused by manual errors is fuel for growth of the
autonomous vehicles market, as well as sustainability reasons, since AVs on average
have lower gas consumption and battery capacity. Many government entities have
strong interest in the technology as well, both for civilian and military purposes.

However, there is a long way for the AVs to become truly autonomous, as the
technology is far from perfect right now. Further issues for the market include concerns
over the possibility of hacker attacks, legislation lagging behind and low confidence in
the technology among consumers.

2.2.3 Smart mobility

Smart mobility refers to using modes of transportation alongside or even instead of
owning a gas-powered vehicle. This can take on many different forms, including
ridesharing, car-sharing, public transportation and more. The need for smart mobility
arose out of increasing traffic congestion and its related side effects, including pollution,
fatalities, and wasted time.

Smart mobility is a trend posing danger to the traditional supply chains and
consumption patterns in the automotive industry. More people willing to pay for Mobility
as a Service (MaaS) means fewer people willing to own their means of transportation.
That could be a fatal blow to the industry Magna operates in if it does not adapt to the
trends fast enough.

2.3 Key Success Factors

2.3.1 Price Competitiveness
Automobile manufacturing is an extremely competitive market and OEMs have
significant bargaining power, often splitting manufacturing contracts between suppliers.
It is imperative for companies to cut costs as much as possible to maintain
competitiveness with their customers, but also to maintain manufacturing margins and
remain profitable.

2.3.2 Frequent Innovation and Research

While a single innovation may provide a temporary advantage, competitors are easily
able to copy technology in the industry. A company will need constant innovations in
their products and processes to develop a pipeline filled with unique profit-inducing
competitive advantages. A sound intellectual property strategy will also go a long way
in protecting said advantages through the creation of a moat.

2.3.3 Favorable Client and Supplier Relations

There are few competitive OEMs with the scale to provide companies like Magna with
the opportunity to grow, meaning that Magna must maintain and nurture good working
relationships with them to effectively identify organic growth opportunities and not
jeopardise existing business contract.

8
3. Balance Sheet Analysis
Maintaining a strong balance sheet has always remained a strong priority for Magna
International, allowing them to make strategic investments in innovation and growth
while also positioning them well in the case of an economic downturn. This strategy is
noted in their healthy asset structure, strong liquidity and solvency ratios, and financial
performance over time.

3.1 Asset Structure

Healthy asset structure with little flexibility

Cash and cash equivalents

Accounts receivable
Inventories
Prepaid expenses and other

Figure 7. Asset Income taxes receivable

Structure at 2019 Assets held for sale
Q4 Deferred tax assets

Source: Annual Report, Investments

Magna International

Magna International’s asset structure in 2019 largely consisted of fixed assets (32%),
accounts receivables (23%), and inventories (13%). Smaller assets include goodwill
(8%), operating lease right-of-use assets (7%) and cash and cash equivalents (5%).
As a manufacturing company, Magna’s machinery and equipment make up 79.6% of
fixed assets, but they also rely, to an extent, on leased machinery. Their inventories
consist mainly of raw materials, supplies, and tooling and engineering.

While Magna’s asset structure has stayed relatively stable over time and is comparable
for their industry, their asset structure ratio has been steadily increasing, suggesting
increased production capabilities but also decreased flexibility due to a stronger
have assets leftover to expand its operations. Their current ratio not only indicates fixed
asset base.

3.2 Debt-Paying Ability

3.2.1 Short-term Liquidity
Magna International has maintained positive working capital and a current ratio greater
than one, indicating the firm will be able to meet all its current obligations and their
strength in liquidity, but also reaffirms their position as an industry leader. Comparable
firms, including Faurecia, a competitor based in Europe, has maintained a current ratio
of less than one.

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 2

1.5

0.5
Figure 8. Current
0
and Quick Ratios 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Annual Report, Current Ratio Quick Ratio

Magna International

Magna has good inventory control with turnover at 10.15 times and just a little over a
month of days in inventory. Likewise, their accounts receivables turnover hovers at
around 6 times, with an average collection period of less than 60 days. Despite their
inventory levels at the time of reporting and slowly growing accounts receivables that
may contribute to a lower quick ratio, their turnover remains healthy and is of no
concern to their liquidity.

The increase in both ratios in 2015 was due to capital restructuring and an acquisition
where they ended the year with excess cash.

3.2.2 Long-term Solvency

Magna has a debt-to-equity ratio of 0.292 — higher than the industry average indicating
their relative aggressiveness in debt financing to support their expanding business —
but is still considered low-risk and is not a highly leveraged company. Likewise, their
high times interest earned of 28.11 ensures that they are well positioned to repay the
interest on their liabilities with the increased earnings made possible through debt
financing. Ultimately, Magna has the ability to meet their long-term debt obligations.

3.3 Cross-time Comparison and Common-Size Analysis

3.3.1 Working Capital and Liabilities

25%

20%

15%
Figure 9. Working 10%
Capital / Total
Assets 5%

Source: Annual Report, 0%

Magna International 2011 2012 2013 2014 2015 2016 2017 2018 2019

Magna International’s working capital in relation to total assets has remained stable
between 2011 and 2014. As mentioned earlier, due to capital restructuring and an
acquisition, in 2015 the company has ended with excess cash, boosting the working
capital metric. In 2016, due to increased investments, working capital in relation to
total assets dropped by whopping 15 percentage points and later stayed at that level.

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3.3.2 Assets
In the graphs below we can observe how did the asset structure of Magna
International change over the years.

Firstly, the relation of fixed assets to total assets remained very stable, fluctuating
around 31% for the entire observed period. On the other hand, total current assets
remained at around 55% and then dropped 10 percentage points in 2016 and stayed
there.

60%
50%
40%
30%
Figure 10. Total 20%
current assets and 10%
Net fixed assets /
0%
Total assets 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Annual Report, Current / Total Assets Fixed / Total Assets

Magna International

The main reason why the share of current assets in the asset structure dropped so
rapidly was a sharp increase of investments and, to a smaller extent, intangible assets.
The year 2019 is special in a way, as leased assets became a relatively large (7%)
part of the total assets.

60%
50%
Figure 11.
40%
Investments,
Operating Lease 30%
Right of Use 20%
Assets and 10%
Intangible Assets /
0%
Total Assets 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Annual Report, Total Current Liabilities Shareholder Equity Long-term Debt
Magna International

3.3.3 Liabilities
As shown in the graph below, Magna International’s liabilities in 2011 were mostly
current, reaching 90% of total. Since 2014 however, there is a clear trend, where
Magna moves away from using current liabilities to finance their operating activities
and uses long term debt instead.

Overall, Magna’s financing strategy has become slightly more aggressive over time
to keep expanding the business.

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 100%
Figure 12. Current
80%
liability/Total
Liabilities, Total 60%
Stockholder’s
40%
Equity and Long-
term Debt / Total 20%
Liabilities + SE
0%
Equity 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Annual Report, Total Current Liabilities Shareholder Equity Long-term Debt
Magna International

3.4 Hidden Assets and Liabilities

3.4.1 Hidden Assets
• Employee Initiatives
Magna International employees volunteer and take part in projects to help communities
and the environment, such as teaching science, technology, engineering and
mathematics to elementary school students. The company encourages its employees
to get involved in their communities and empower the next generation.

• Intellectual Property
Magna International is a leader in the automotive manufacturing industry. As a
company competing in the secondary sector, it relies on its production technology and
its R & D in order to differentiate itself from competitors. As such, Magna International
owns 3800 patents globally, 1300 of which were granted in the past three years alone.
The company also owns various trademarks and licenses.

• Innovation Awards
Thanks to its edge-cutting technology, Magna International was granted numerous
accolades and awards. It has received a PACE Award for its Composite Space Frame
Liftgate Reinforcement earlier this year, being nominated for the award for the second
time running. The company was also granted several awards by General Motors
during their 28th Annual Supplier Awards in June 2020. This shows the high quality of
Magna International’s innovation and production.

• Talent
In order to stay competitive in the future, Magna International manages its talents. It
recognises the need for an effective workforce and achieves this through attraction and
recruitment of top talent, professional development – from technical apprenticeships
and summer placements for future candidates to workshops and mentorship programs
to develop the skills of current employees – as well as succession planning.

• Contracts
Having been in the industry for over sixty years, Magna International has built itself a
solid portfolio of clients. Its main customers are General Motors with whom it has been
working since 1959, BMW, Ford and Volkswagen, among other firms. Their relations

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have proven to be stable even in the long-term, and the recent-signed contracts
assures lasting stability.

• Reputation
Magna International was ranked 8th in the Motor Vehicle Parts Industry by Fortune.
Forbes also recognised the company as one of America’s and Canada’s best
employers in 2020. As mentioned previously, Magna International also has received
numerous awards from its customers – including General Motors – and other external
parties. It takes a lot of pride in keeping a positive brand image.

• Industry Leading Position

Magna International is part of the top 10 Tier 1 Supplier for automotive parts, based on
2018 global sales, along with Bosch and Continental Corporation. It supplies some of
the biggest automobile firms such as VW and Ford. Furthermore, with its various
patents and know-hows, Magna International was able to secure its position as one of
the market leaders in the motor vehicle parts industry.

• Undervalued Subsidiaries
Magna International owns 51 subsidiaries, including recent acquisitions such as Italian
OLSA S.p.A. and German Haptronik GmbH in 2018. Although none of these 51
subsidiary firms are currently traded on Stock Exchanges, it is possible that they are
being undervalued by the market. Hence, if one or more subsidiary firms developed
new key inventions, the value of Magna International would be positively affected.

• Current R & D and Relationship-Building

The products, techniques and relations that Magna International is currently building
are not accounted for in the financial statements. As a competitive player in the industry,
Magna International is constantly investing in R & D for the next ground-breaking
innovation and it is also looking for new partners and customers to strengthen their
position in the market.

3.4.2 Hidden Liabilities

• Environmental Costs
Despite aiming to generate Zero Waste to Landfill by 2022, Magna International still
affects the environment in their activities. Its manufacturing activities do require energy
in the form of natural gas and electricity. As of 2020, Magna International is exploring
renewable energies but it has yet to adopt clean energy sources. 55% of the energy
consumed was supplied from grid electricity in 2019. Furthermore, the company has
no plan to go green in the foreseeable future. It has emitted 2,126,678 tons of CO2
classified as Scope 1 and 2 emissions in 2019. Despite having set electricity and water
consumption reduction, if no action is taken, the reputation of the firm will be affected
too.

• Pending Legal Obligations

(a) Brazil’s Federal competition authority, the Conselho Administrativo de Defesa
Economica, has been leading an antitrust investigation on the company since 2014.
There is no prediction of the duration or the outcome of the investigation. (b) There is
also an on-going lawsuit in the family owning Magna International. Frank Stronach, the

13
founder of the company, is suing his daughter, two grandchildren and others over the
control of the family businesses.
Being involved in such legal proceedings may harm the firm’s image and reputation,
especially the second case which questions the efficiency of the company’s
management, thus the company’s future performances too.

• Foreign Exchange
The exchange rates may fluctuate and in the case of the Euro, Renminbi and other
foreign currency appreciating against the US dollar, there will be losses as the firm
negotiates contracts in US dollars and Canadian dollars. This was already the case in
2019.

• Warranty
Magna International ensures warranty on customer agreements for existing or
probable claims on product default issues. As customers expect increasingly
comprehensive guarantees, it is possible that the company’s warranty cost increases
accordingly.

14
4. Income Statement Analysis

4.1 Cross-time Comparison and Common-Size Analysis

A common-size analysis of the income statement shows strong stability in the
percentage structure of expenditure and income over the years. The only sharp change
recorded in the period of 2016-2019 is the drop of net income and net income
attributable to Magna Intl. in the last year. As presented in the annual report for 2019,
the drop of net income was caused by drop of sales induced by a labor strike at General
Motors, which is the biggest client of Magna. Unfavorable changes in the FX market
(dollar appreciation) contributed to the lower net income as well. Overall, majority of
the underperformance was caused by external shocks.

4.2 Revenue and Cost Segment Analysis

4.2.1 Segment Analysis by Geography
In the table below we can see total sales in each region. The lion’s share of revenue
comes from North America, but the revenue growth in the region is stagnant. This
year’s decline in sales in NA was caused by labor strike at the GM plants located in
the USA.

Revenue growth in the observed period comes almost exclusively from Europe, which
becomes a bigger part of the company’s operations each year. Revenue inflow from
Asia and the rest of the world stay below 10% in each year, no clear growth pattern
can be declared.

2016 2017 2018 2019

North America 20,744 20,905 20,547 19,349
Europe 13,080 15,177 17,055 17,331
Asia 2,674 2,791 2,540 2,164
Rest of the world 465 584 685 587
Figure 13. Total Sales by Region 2016-19
Source: Annual Report, Magna International

2019

2018

Figure 14. Total 2017

Sales by
2016
Region 2016-19
0% 20% 40% 60% 80% 100%
Source: Annual Report,
Magna International North America Europe Asia Rest of the world

Due to changes in accounting policy, Magna International does not provide data on
cost structure by region since 2018.

15
4.2.2 Segment Analysis by Product
The most important product group by amount of total sales is undoubtedly ‘Body
Exteriors & Structures’, followed by ‘Power&Vision’, summed up they constitute from
70% to 75% of total revenue. Total sales in these two categories, together with the
‘Seating Systems’ category do not show much growth in the dataset. The most
dynamic part of the business is the ‘Complete Vehicles’ category, which almost
doubled revenue flow corresponding to the category in just two years.

2017 2018 2019

Body Exteriors & Structures 16,613 17,527 16,458
Power & Vision 11,629 12,321 11,312
Seating Systems 5,224 5,548 5,577
Complete Vehicles 3,547 6,018 6,707
Figure 15. Total Sales by Product Group 2017-19
Source: Annual Report, Magna International

2019

2018

Figure 16. Share of

2017
revenue by product
group 2017-19 0% 20% 40% 60% 80% 100%

Source: Annual Report, Magna Body Exteriors & Structures Power & Vision
International Seating Systems Complete Vehicles

When we use adjusted EBIT in relation total sales, we notice the sharp contrast in
profitability between three major product categories and the ‘Complete Vehicles’
category. Even though the revenue coming from sales of ‘Complete vehicles’ is
growing fast, the margin is considerably lower than the consolidated average.

2017 2018 2019

Body Exteriors & Structures 8,10% 8,06% 7,89%
Power & Vision 10,17% 9,50% 6,60%
Seating Systems 8,31% 7,68% 5,59%
Complete Vehicles 1,86% 1,13% 2,15%
Figure 17. Adjusted EBIT/Total sales by product group 2017-19
Source: Annual Report, Magna International

4.3 Costs of Goods Sold Analysis

Common-size analysis shows that shares of each cost category in the entire cost
structure are fairly stable. The bulk of the costs comes from purchasing raw materials,
as is expected from a manufacturing company in a capital-intensive field like
automotive.

16
 2016 2017 2018 2019
Material 22,74 24,349 25,355 24,585
Direct labour 2,543 2,743 2,953 2,815
Overhead 5,84 6,166 6,747 6,622
Cost of goods sold 31,123 33,258 35,055 34,022
Figure 18. Material, direct labour, overhead, COGS 2016-19
Source: Annual Report, Magna International

4.3 Business Model Analysis

4.3.1 Business Model Analysis
• Profitability
Magna International’s profitability was assessed through various measures. In 2019,
Magna’s Return on Invested Capital (ROIC) was 10.96% and its Weighted Average
Cost of Capital (WACC) was 8.83%. Since ROIC-WACC equals 2.12%, i.e. is higher
than 2%, we can infer from the measure that Magna was creating value in 2019. The
Return on Equity (ROE) and the Return on Assets (ROA) were respectively 14.7% and
6.31% which are both satisfactory values, meaning that the firm was profitable.

• Sustainability
Magna’s ROIC was consistently at least 2% higher than its WACC between 2011 and
2019. Its WACC was on a downward-sloping trend until 2018, but in 2019, it increased
again. On the other hand, its ROIC has been rather inconsistent over that time period,
hitting its lowest point in 2019. The combination of a higher WACC and a lower ROIC
explains the dip in the last financial year.

Assuming good ROE ranges from 15% to 20%, Magna has been generating high ROE,
especially between 2014 and 2016. However, there was a slight decrease of 2.76% in
2019. The ROA indicates a high profitability even in 2019 staying above the 5%
threshold, in spite of a decline.

Overall, Magna is able to sustain profits, consistently presenting high returns to its
investors. However, all three measures indicate a drop in 2019, which was due to lower
net income, as well as higher invested capital.

• Niubility
Despite a slower growth in recent years, Magna is still generating healthy profits. By
investing heavily in R&D, the company aims to develop the technology that will
revolutionize today’s vehicles. It is currently partnering with various firms to create
tomorrow’s mobility vehicles. For instance, Magna has collaborated with Lyft to
develop auto-drive systems. It is also working on electrical vehicles with the Chinese
group BAIC. It should also be noted that the firm has been partaking numerous
mergers and acquisitions (M&As) in recent years. These not only allow the Canadian
giant to penetrate new markets, but they also allow it to acquire new clients and
knowledge.

Through the collaboration with key partners, as well as strategic M&As, Magna is still
developing its potential growth opportunities. Furthermore, as a market leader, Magna

17
has the potential to get ahead of its competitors and diversify into new markets, taking
advantage of its economies of scale and scope.

• Expendability
The auto parts industry is not a new industry. As such, it has less room for expansion
as other technology industries. From the data collected since 2011, we can see that
higher capital invested does not systematically translate to higher profitability,
measured by ROIC. As a matter of fact, net income did not grow enough to offset the
increase of the denominator. Hence, a rise in capital invested does not necessarily
generate a proportionate increase in revenue. We may deduce that Magna has low
expendability.

• Monopolibility
In terms of “monopolibility”, Magna’s business model does not allow for anyone to run
the firm. It is still a family business and the current CEO is the former husband of the
founder’s daughter. In 2018, Frank Stronach, founder of Magna, filed a lawsuit against
his daughter Belinda, and current chairman and president of the Stronach Group which
owns Magna. He demanded $ 520 million in compensation and damages for family
assets and trust funds mismanagement, evicting him from the company. The case was
only settled in 2020 by splitting the company between the two parties. This illustrates
how complicated the head of the business is and it is likely that Magna would be highly
affected by sudden changes in the executive team.

• Adaptability
The automobile industry has changed significantly since the founding of Magna 60
years ago. Nevertheless, Magna has been able to seize the opportunities that arose
from the changing market to grow and develop itself. The firm has consistently invented
key products, processes and materials, such as the single belt pulley system. Now that
it has established itself as a market leader, it has the resources to stay relevant by
investing in R&D and finding the talents of tomorrow. In addition to this, Magna has
also been strongly participating in M&A activities since 1996 and the European
expansion. If it estimates that a new entrant is threatening its position and that it would
have trouble staying competitive on its own, it may consider an M&A to rally the new
firm under its own umbrella.

• Vulnerability
Magna has relatively high fixed costs – the plants, facilities and machinery require
substantial initial investments. In the competitive automobile industry, many companies
contend to attract customers. Current market leaders may suddenly be dethroned by
new entrants which have revolutionary products or processes. Thus, competition is
fierce, and demand may be affected by the rivals’ pressure. With high short-term
average total costs, Magna has type 1 vulnerability against external shocks, i.e. a small
change in demand may lead to a comparatively large change in cost. Furthermore, as
a manufacturer, Magna relies on its raw material suppliers. A change in the cost of
inputs will inversely impact the cost of production.
In the short term, demand for automobiles is reasonably elastic, as one may delay the
purchase of a car. Assuming there is an economic shock, demand for automobiles
would definitely be negatively impacted, as end consumers would have less disposable

18
income. In the case of the COVID-19 global pandemic, there is an estimated revenue
loss of $ 5.5 billion.

4.3.2 Life Cycle and Profitability

Magna’s investments, costs and expenses, sales and net income have been relatively
stable since 2012-2013. There has only been a 13% growth in sales and net income
between 2013 and 2019. However, the change in invested capital was more significant,
with an increase of 46% over the same time period. Despite its efforts to pursue
profitability growth, Magna has arguably entered a more stable stage of its life cycle.
Nevertheless, it has to be noted that the analysis was only conducted on 9 years, from
2011 to 2019 because of limited access to past information, and that Magna has a
history of over 60 years. Hence, the apparent slower growth may be because the
company is currently in a recession period. Given its current business model and
strategy, there appears to be less room to further develop the business, but this does
not mean the company will not be able to grow anymore. Considering its current
investments, Magna still has a lot of potential in the electrical and autonomous vehicles
industries.

19
5. Statements of Cash Flow Analysis

5.1 Cash Flow Structure

CASH INFLOWS
(in millions USD) 2019 2018 2017 2016 2015
From operating activities $10,988 9716 9036 8776 6615
Percentage of total inflow 87% 88% 88% 91% 72%
From investment activities 1,548 223 381 138 802
Percentage of total inflow 12% 2% 4% 1% 9%
From financing activities 95 1,092 806 701 1,709
Percentage of total inflow 1% 10% 8% 7% 19%
CASH OUTFLOWS
(in millions USD) 2019 2018 2017 2016 2015
From operating activities (1,092) (741) (1,072) (773) (1,215)
Percentage of total outflow 18% 13% 18% 12% 28%
From investment activities (1,982) (2,499) (2,509) (3,931) (2,090)
Percentage of total outflow 32% 43% 42% 61% 49%
From financing activities (3,042) (2,535) (2,360) (1,721) (968)
Percentage of total outflow 50% 44% 40% 27% 23%

Figure 19. Magna’s Cash Flow Structure 2016-19

Source: Annual Report, Magna International

Nearly all of Magna’s positive cash flows from the past nine years are attributed to their
operating cash flows, a cash flow that has seen a general increase across time, though
not an increase in percentage of inflow. Nearly 90% of cash inflow is a result of
operating activities, while the total inflow percentage from investment and financing
varies across years — a result of the different acquisitions and debt policies. The most
recent increase in investment cash inflow in 2019, for example, is a result of the
proceeds from the sale of their stake in Lyft, Inc.

Outflow from financing activities has been increasing as Magna continues to pay back
both short-term and long-term debt. The majority of financing outflow is due to changes
in equity: Magna has consistently increased and paid dividends annually, and they also
repurchase common shares.

20
6. Profitability Analysis

6.1 DuPont Summary

Magna International’s has maintained a high level of ROE for the entire observed
period. ROE has grown from 12% in 2011 and peaked at 22% in 2015, overtaking
Continental AG, a major competitor. Even though Magna’s ROE has dropped since, it
is still very high compared to competitors in 2019.

Main reason for the outstanding performance in terms of ROE is the Asset Turnover
(AT) ratio, which indicates Magna’s efficiency in asset utilisation. Even though the
company’s AT is gradually falling down, it is still much higher than the equivalent of
competitors. Net Profit Margin has slightly improved and the Equity Multiplier has
increased as well, but neither of them is exceptional compared to industry average.

30
25
20
15
10
5
0
-5 2011 2012 2013 2014 2015 2016 2017 2018 2019
Figure 20. ROE of
-10
Magna and
Robert Bosch Denso
competitors Continental AG Magna
ZF Friedrichshafen
Source: Annual Reports

6.2 Profit Margin Analysis

6.2.1 EBITDA Margin

45
40
35
30
25
20
15
10
5
Figure 21. EBITDA 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Margin
Robert Bosch Denso Continental AG Magna
Source: Annual Reports

Magna’s EBITDA Margin is on the lower than comparable companies. In the last
decade it has grown slightly, but it is lower than the margins Magna’s competitors have,
which have reached up to 40%.

21
6.2.2 Net Profit and Expenses Analysis
15

10

Figure 22. Net 0

2011 2012 2013 2014 2015 2016 2017 2018 2019
profit margin
-5
Source: Annual Reports Robert Bosch Continental AG Denso Magna

When we look more closely at the profit margin, the situation changes dramatically
compared to gross profit margin. When we take operating expenses and taxes into
account, Magna’s financial results become much more satisfying compared to
competitors, even though they do not exceed industry average, but rather follow it.

The vast discrepancy between Gross and Net Profit Margins is caused by the fact that
Other Operating Expenses account is relatively insignificant compared to COGS
account (the former equal to only around 10% of the latter) in Magna’s P/L statements,
which is generally not the case for the competitors (Robert Bosch, for example has
Other Operating Expenses equal to 60% of it’s COGS, which causes incredible Gross
Profit Margin and just mediocre Net Profit Margin).

6.3 Asset Turnover Analysis

6.3.1 Total Asset Turnover
Magna International’s total asset turnover was relatively stable in the period 2011-2014.
It dropped in 2015 and it has been on a downward-sloping trend since then. Despite
only having the value of the industry average total asset turnover ratio from 2014
onwards, Magna’s total asset turnover is largely above that of its competitors. The
decrease is due to significant investments in non-current assets, including fixed assets,
investments and intangible assets, but resulting in a relatively low increase in revenues.
Nevertheless, Magna’s total asset turnover remains higher than the industry average.
This is an indicator of the efficiency of the firm in utilising its assets to generate
income. A lower ratio may entail higher investments for future projects and
development that have not returned profits yet.

2.5

1.5

0.5
Figure 23.
Total asset 0
turnover (%) 2011 2012 2013 2014 2015 2016 2017 2018 2019
Robert Bosch Denso Continental AG
Source: Annual Magna ZF Friedrichshafen Industry
Reports

22
In the next parts, Magna International’s asset turnover is analysed from 3 angles,
namely: accounts receivable turnover, inventory turnover and fixed asset turnover.

6.3.2 Accounts Receivable Turnover

Magna’s accounts receivable turnover has been fairly stable in 2011-2019. There
might be a slight downward-sloping trend but the range of data available does not allow
for a definite conclusion.

Figure 24. 4
Accounts
3
Receivable 2011 2012 2013 2014 2015 2016 2017 2018 2019
Turnover (%)
Robert Bosch Denso Continental AG
Source: Annual Magna ZF Friedrichshafen Industry Average
Reports

Magna’s ratio lies within the industry average since 2014. Although it did go below the
industry level in 2017-2018, it increased again in 2019. Overall, Magna sustains a
satisfactory accounts receivable turnover ratio, staying above most of the rival
companies analysed in this report. This suggests that, on average, Magna can
effectively collect cash from its downstream customers.

6.3.3 Inventory Turnover

Magna International’s inventory turnover has been slowing down over the period 2011-
2019, but the slope is relatively weak.
In spite of a decreasing inventory turnover, Magna stays well above the industry
average and the four other global market leaders’ ratios. We can deduce that Magna
sells inventory faster than its competitors.

14
12
10
8
6
4
2
Figure 25.
0
Inventory 2011 2012 2013 2014 2015 2016 2017 2018 2019
Turnover (%)
Robert Bosch Denso Continental AG
Source: Annual Magna ZF Friedrichshafen Industry Average
Reports

23
Inventory turnover has been highly correlated to changes in total revenue since 2011.
The general decreasing trend in total revenue over the time period can also be seen
in the negative slope of the inventory turnover. We can note that the subtle increase in
revenue in 2015-2017 happened simultaneously with a proportionate increase in
inventory turnover. The evolution of A/R turnover also reflects changes in revenue to
a lesser extent. Magna’s A/R turnover has remained relatively stable over the years
despite significant variations in revenue. The general negative slope indicates that the
market environment might not be favourable or that Magna’s management efficiency
is starting to see its limits.

It has to be noted that since 2017, the firm’s A/R ratio has been increasing again, while
its inventory turnover has been decreasing. One explanation is that Magna has
tightened its accounts receivable collection policy, i.e. it expects its downstream
customers to pay the cash of the receivables faster. As sales have been decreasing
and inventory takes longer to sell, the company might be “artificially” maintaining a
certain level of cash within the firm by allowing for a lesser time gap between a sale
and the collection of the payment.

45000 14
40000 12
35000
10
30000
25000 8
20000 6
Figure 26. A/R 15000
4
turnover, 10000
5000 2
inventory
0 0
turnover, and 2011 2012 2013 2014 2015 2016 2017 2018 2019
revenue
Source: Annual Total Revenue Accounts Receivable Turnover Inventory Turnover
Reports

6.3.4 Fixed Assets Turnover

Magna’s fixed assets turnover has been on a negative trend. It decreased sharply
between 2011 and 2012, as well as between 2014-2015.

Before 2015, Magna was clearly the most efficient company in terms of fixed assets
turnover, its ratio ranging above 6%, while its main competitors all scored below 5%.
Nevertheless, Robert Bosch’s fixed asset turnover ratio being on an upward-sloping
trend and Magna being on a conversely negative trend led to the rival to quickly catch
up with Magna. Robert Bosch’s data was only available up to 2017, but in 2015-2017,
the turnover of Robert Bosch matched Magna’s and it even surpassed it in 2017.
Magna is still in the upper range of the industry, in spite of the fall.

From the firm’s balance sheets, we can observe a significant increase in investments
in fixed assets. However, these investments did not fructify, instead, it affected the
efficiency of the company. Furthermore, the negative trend of Magna’s fixed asset
turnover suggests that the firm might be overinvesting in property, plants and
equipment, and other fixed assets.

24
 8
7
6
5
4
3
2
1
Figure 27.
0
Fixed asset 2011 2012 2013 2014 2015 2016 2017 2018 2019
turnover (%)
Robert Bosch Denso Continental AG
Source: Annual Magna ZF Friedrichshafen
Reports

6.4 Equity Multiplier

Magna’s Equity Multiplier has grown over the years and right now it is very close to the
industry’s average, about 2,3. With fewer opportunities to gain market share, Magna’s
leaders decided to use higher leverage to maintain high ROE. Equity Multiplier has
grown in unison with the size and earnings of the company, so the risk associated with
higher leverage has been offset, at least partially.

4
3.5
3
2.5
2
1.5
1
Figure 28. 0.5
Equity
0
multiplier 2012 2013 2014 2015 2016 2017 2018 2019

Source: Annual Denso Robert Bosch GMBH Continental AG Magna

Reports

25
7. Forecasting

7.1 Revenue Forecasting

Most of Magna’s business is derived from select OEMs operating in all major markets
with whom they sign supply contracts. Since OEMs have a lot of bargaining power,
Magna’s revenue will be tightly wound with light vehicle production growth — a key
index we use to benchmark our forecast. We also use GDP growth as an index to
measure the effects of COVID on the firm’s revenue.
Since Magna does not report detailed earnings for each product segment, we make
our core assumptions based on the effects of company-wide revenue and the
aforementioned indexes.

7.1.1 Core Assumptions

Magna’s business is driven by downstream demand. Therefore, we will rely on the
estimated growth rate of light vehicle production, the largest segment of their client’s
business and Magna’s orders, as an estimate of demand from the OEMs.
Great results from the past show that Magna usually grows faster than the market,
which points to Magna's competitive advantage. We should assume Magna will
maintain its advantage, and thus its better-than-average results.
We also assume that overall prices will not fluctuate significantly, and otherwise will be
caught by the GDP calculations.

• Global light vehicle production for the top 10 OEMs, all of which do business
with Magna, is expected to increase 14% y/y in 2021, and 7% y/y in 2022. In
2023, 2024, and 2025, we forecast production to remain at a 3% increase.

• GDP growth is forecasted by the World Bank. The three scenarios presented
below represent the scenarios if future GDP is close to, below, or above what
has been forecasted. Adjustments have been made based off of these
calculations. We forecast a 70% chance of outperforming, 20% chance of
aligning with, and a 10% chance of underperforming against the competitor
average based on 2010-2019 market results.

7.1 Gross Margin and Expenses Forecast

7.1.2 Core Assumptions
• Financial and administrative expenses remain constant from 2020 to 2024
• Gross margin may vary over time because of the business cycle
2020E 2021E 2022E 2023E
Gross Margin 12.0% 12.0% 12.0% 14.0%
Administrative Expenses 4.5% 4.5% 4.5% 4.5%
Financial Expenses 0.2% 0.2% 0.2% 0.2%
Net Income (millions, USD) 2087 2187 2231 2275
Figure 29: Net income forecast

26
8. Earnings Management Analysis
Magna constantly reiterates the fact that their strong balance sheet is a competitive
advantage and gives them a lot of flexibility to make strategic investments and have
them well-positioned for the future. Therefore, there is a great incentive to manage
earnings to maintain this perceived competitive advantage in the eyes of the investor.

8.1 Revenue Growth

Comparing revenue, cash flow from operations, and operating income of Magna
International reveals an inconsistent relationship between the three.

$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
Figure 30.
$10,000
Revenue
$5,000
growth
$0
comparison 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Annual Sales Cash Flow from Operations Operating Income

Reports

Revenue follows a general trend of growth, while operating income and operating cash
flow toe the same line, with the latter being slightly greater, save 2015. As earnings
are expected to be collected in cash, there is nothing to be suspicious about here.

While the inconsistent relationship between revenue and cash flows may be worrying,
Magna is reporting revenue growth consistent with the industry and comparable firms,
and do not have any other notable earning management concerns within revenue. In
fact, changing asset accounting policies in 2019 to comply with GAAP measures have
had a negative impact on ROI.

Overall, Magna reports revenue consistent with GAAP and there is no evidence of
overstated revenues or significant earnings management.

8.2 Accounts Receivable Growth

Because almost 80% of all revenue comes from just 7 major clients in the automotive
industry, all of which Magna International has long-term relationship with, allowance
for bad debts is not included in their operations. In case any client could not meet
payment obligations the lost amount will directly affect earnings. No bad debt expense
allowance exists, earnings cannot be managed in this way.

27
 8000
7000
6000
5000
4000
Figure 31. 3000
Accounts 2000
receivable 1000
0
Source: Annual 2011 2012 2013 2014 2015 2016 2017 2018 2019
Reports

The total value of accounts receivable has been growing as revenue was growing. In
2019 the value of the AR account dropped because of lower sales and higher value of
the cash and cash equivalents account.

17.5%
17.0%
16.5%
Figure 32. 16.0%
Accounts 15.5%
15.0%
receivable /
14.5%
Revenue 14.0%
13.5%
Source: Annual 2011 2012 2013 2014 2015 2016 2017 2018 2019
Reports

The ratio of accounts receivable to revenue is fairly stable, with the recent drop from
17% to 15% being caused by higher value of the cash and cash equivalents account
caused by receipts timing.

8.3 Major Expense Accounting

In the period 2011-2019, Magna has increased its expenses through COGS as the
scale of its activities has grown, but also through non-recurring items such as
restructuring. We can see from the Figure 4 here below that the expense-to-revenue
ratio has been decreasing from 2011 to 2015 and stagnated until 2018, but the ratio
increased slightly in 2019 through time, suggesting a decreasing efficiency of the
company’s expense management. Nevertheless, this may be explained by the major
M&A strategy that Magna has opted to sustain competitivity and develop its innovative
R&D activities. No manipulation of the expenses has been noted.

30
25
20
15
Figure 33.
10
Expense /
Revenue 5
0
Source: Annual 2011 2012 2013 2014 2015 2016 2017 2018 2019
Reports

28
If we take a closer look at the expenses recorded under “Other Expenses” in the annual
reports change in relation to revenue change, in terms of impairment loss, non-
recurring items and non-operating items (Figure 5), we can see that before 2018, no
major phenomenon has occurred. However, in 2019 Magna sold its global Fluid
Pressure & Controls (FP&C) business to Hanon Systems for $1.23 billion. This
generated a gain of $447,000 which was offset by the impairment of assets of $727,000.
Subsequent to an assessment of the equity-accounted investments in Chinese Getrag
(Jiangxi) Transmission Co., Ltd. and Dongfeng Getrad Transmission Co. Ltd, as well
as European Getrag Ford Transmission GmbH, concluded that sales were below
expectations due to increased pricing pressure in the Chinese market, decreasing
volume projections for demand in the markets the above companies operate in. We
believe that this conclusion is fair and justified.

Another point which may be noted is that Magna, being a company of large scale,
undergoes restructuring on a regular basis. Only specific operations, divisions and
regions are restructured at a time, hence the spread out and on-going nature of the
restructuring expenses. In particular, European activities have been the focus of the
restructuring since the beginning of the period analysed (2011-2019). The aim of the
restructuring is to improve efficiency and profitability.

0.4
0.3
0.2
0.1
0
1 2 3 4 5 6 7 8 9
-0.1
-0.2
Figure 34.
-0.3
Other
-0.4
expenses /
Revenue -0.5
Non-Recurring Items/Revenue Impairment/Revenue
Source: Annual Non-Operating Items/Revenue
Reports

8.4 Related Party Transactions

The only major transaction in the 2019 fiscal years selling the FP&C systems part of
the Power & Vision product segment. The buying party, Hanon Systems, is not related
to Magna International.

No signs of earnings management through related party transactions observed.

29
9. Valuation

9.1 Discounted Cash Flows

The DCF framework relies on discounting all future free cash flows of a company,
adding cash and equivalents and then deducting the total debt and noncontrolling
interest of a company to recognize the enterprise value.

𝑉0 − 𝐷 + 𝐶
𝑃O =
𝑆
𝑉! = PV(Future Free Cash Flow)
𝐹𝐶𝐹" 𝐹𝐶𝐹& 𝐹𝐶𝐹' + 𝑉'
= + + ⋯ +
1 + 𝑟#$%% (1 + 𝑟#$%% )& (1 + 𝑟#$%% )'
1 + 𝑔(%(
𝑉' = ∗ 𝐹𝐶𝐹'
𝑟#$%% − 𝑔(%(
Key Assumptions:
• Valuation Date: 10/12/2020
• WACC = 8,28%
• Growth in perpetuity (after 2025) = 2%

Result of valuation:
Sum of PV FCF (2021 - 2025) 5111
Terminal value 16559.87
Total PV of FCF 21671.12
(+) Cash 1498
(-) Debt 3930
(-) Minority Interest 204
Enterprise Value (M$) 19035.12

Number of shares outstanding (M) 299.26

Fair price per share $ 63.61
Current price $ 62.44
Source: Group 17 research

WACC number was provided by a website called Gurufocus.com, which used Capital
Asset Pricing Model to calculate it.

9.2 Residual Income Model

Residual income is defined as the earnings minus the cost of capital. The basic
assumption is that the firm makes its earnings from the capital it has invested in the
last period. The “residual” refers to the abnormal return on invested capital, that is, the
return beyond cost of capital.

30
 Cost of equity 10,20%
Assumed growth 2%
Sum of PV Value Added (M $) $ 1,514.58
Terminal Value (M $) $ 5,987.59
Present Book Value (M $) $ 10,206.00
Absolute value (M $) $ 17,708.17
Number of shares outstanding (M) 299.26
Fair price per share $ 59.17

After summing up the residual earnings in the next 5 years and the expected residual
earnings later than that we add book value and divide it by the number of shares. The
result of the RI model is close to the result of the DCF model, which suggests lack of
abnormalities.

9.3 Conclusion
Target price according to the DCF model = 63,61$
Target price according to the RI model = 59,17$

Because the target prices are very close to the current market price of the stock, we
believe the best decision is to HOLD.

31
Appendix
A. 2016-19 Balance Sheet ii
B. 2018-19 Balance Sheet: Common-Size Comparison iii
C. Income Statement 2016-19 iv
D. Income Statement Cross-size Analysis 2017-19 v
E. Dupont Analysis vi
F. Table of Figures vii
 A. 2016-19 Balance Sheet

MAGNA INTERNATIONAL INC.

Consolidated Balance Sheets
(as of Dec 31)

ASSETS 2019 2018 2017 2016

Current assets
Cash and cash equivalents $ 1,276 $ 684 $ 726 $ 974
Accounts receivable 5,927 6,548 6,695 6,165
Inventories 3,304 3,403 3,542 2,804
Prepaid expenses and other 238 193 237 220
Income taxes receivable 0 57 0 0
Assets held for sale 0 949 0 0
Deferred tax assets 0 0 0 0
Total current assets 10,745 11,834 11,200 10,163
Investments 1,210 2,189 2,079 1,850
Fixed assets, net 8,260 8,095 8,176 7,022
Operating lease right of use assets 1,811 0 0 0
Intangible assets, net 484 560 650 621
Goodwill 1,976 1,979 2,099 1,923
Deferred tax assets 308 300 238 268
Other assets 996 988 1,026 719
Consolidated total assets 25,790 25,945 25,468 22,566
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Short-term borrowings 0 1,098 259 623
Accounts payable 5,628 6,094 6,283 5,430
Accrued salaries and wages 753 769 836 768
Other accrued liabilities 1,800 1,734 1,739 1,639
Income taxes payable 17 0 18 96
Deferred tax liabilities 0 0 0 0
Long-term debt due within one year 106 201 108 139
Current portion of operating lease liabilities 225 0 0 0
Liabilities held for sale 0 408 0 0
Total current liability 8,529 10,304 9,243 8,695
Long-term debt 3,062 3,084 3,195 2,394
Operating lease liabilities 1,601 0 0 0
Long-term employee benefit liabilities 677 597 670 667
Other long-term liabilities 371 400 326 298
Deferred tax liabilities 419 401 322 293
Total liability 14,659 14,786 13,756 12,347
Shareholders' equity
Common Shares 3,198 3,380 3,617 3,796
Contributed surplus 127 120 119 105
Retained earnings 8,596 8,376 8,074 7,318
Accumulated other comprehensive loss (1,090) (1,175) (600) (1,451)
Stockholders equity attributable to Magna
10,831 10,701 11,210 9,768
International Inc
Non-controlling interests 300 458 502 451
Total stockholder's equity 11,131 11,159 11,712 10,219
Total liability and stockholders' equity 25,790 25,945 25,468 $ 22,566

ii
 B. 2018-19 Balance Sheet: Common-Size Comparison

MAGNA INTERNATIONAL INC.

Consolidated Balance Sheets
(as of Dec 31)
2019 2018
ASSETS $ % $ %
Current assets
Cash and cash equivalents $ 1,276 4.95% $ 684 2.64%
Accounts receivable 5,927 22.98% 6,548 25.24%
Inventories 3,304 12.81% 3,403 13.12%
Prepaid expenses and other 238 0.92% 193 0.74%
Income taxes receivable 0 0.00% 57 0.22%
Assets held for sale 0 0.00% 949 3.66%
Deferred tax assets 0 0.00% 0 0.00%
Total current assets 10,745 41.66% 11,834 45.61%
Investments 1,210 4.69% 2,189 8.44%
Fixed assets, net 8,260 32.03% 8,095 31.20%
Operating lease right of use assets 1,811 7.02% 0 0.00%
Intangible assets, net 484 1.88% 560 2.16%
Goodwill 1,976 7.66% 1,979 7.63%
Deferred tax assets 308 1.19% 300 1.16%
Other assets 996 3.86% 988 3.81%
Consolidated total assets 25,790 100.00% 25,945 100.00%
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Short-term borrowings 0 0.00% 1,098 7.43%
Accounts payable 5,628 38.39% 6,094 41.21%
Accrued salaries and wages 753 5.14% 769 5.20%
Other accrued liabilities 1,800 12.28% 1,734 11.73%
Income taxes payable 17 0.12% 0 0.00%
Deferred tax liabilities 0 0.00% 0 0.00%
Long-term debt due within one year 106 0.72% 201 1.36%
Current portion of operating lease liabilities 225 1.53% 0 0.00%
Liabilities held for sale 0 0.00% 408 2.76%
Total current liability 8,529 58.18% 10,304 69.69%
Long-term debt 3,062 20.89% 3,084 20.86%
Operating lease liabilities 1,601 10.92% 0 0.00%
Long-term employee benefit liabilities 677 4.62% 597 4.04%
Other long-term liabilities 371 2.53% 400 2.71%
Deferred tax liabilities 419 2.86% 401 2.71%
Total liability 14,659 100.00% 14,786 100.00%
Shareholders' equity
Common Shares 3,198 12.40% 3,380 13.03%
Contributed surplus 127 0.49% 120 0.46%
Retained earnings 8,596 33.33% 8,376 32.28%
Accumulated other comprehensive loss (1,090) -4.23% (1,175) -4.53%
Stockholders equity attributable to Magna International
10,831 42.00% 10,701 41.24%
Inc
Non-controlling interests 300 1.16% 458 1.77%
Total stockholder's equity 11,131 43.16% 11,159 43.01%
Total liability and stockholders' equity 25,790 100.00% 25,945 100.00%

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 C. Income Statement 2016-19

MAGNA INTERNATIONAL INC.

Consolidated Income Statement
(as of Dec 31)

2019 2018 2017 2016

Income Statement
Sales $ 39,431 $ 40,827 $ 38,946 $ 36,445
Costs and expenses
COGS 34,022 35,055 33,258 31,123
Depreciation and amortization 1,345 1,278 1,173 1,056
SG&A 1,697 1,664 1,668 1,601
Interest expense, net 82 93 70 88
Equity income (178) (277) (261) (233)
Other expense, net 240 63 39 30
EBIT 2,223 2,951 2,999 2,780
Income taxes 591 619 744 706
Net income from continuing operations 1,632 2,332 2,255 2,074
Income (loss) from discontinued operations, 0 0 0 0
net of tax
Net income 1,632 2,332 2,255 2,074
Loss (income) attributable to non-controlling 133 (36) (49) (43)
interests
Net income attributable to Magna $ 1,765 $ 2,296 $ 2,206 $ 2,031

iv
 D. Income Statement Cross-size Analysis 2017-19

MAGNA INTERNATIONAL INC.

Consolidated Income Statement
(as of Dec 31)

2019 2018 2017

Income Statement $ % $ % $ %
Sales $39,431 100.00% $40,827 100.00% $38,946 100.00%
Costs and expenses
COGS 34,022 86.28% 35,055 85.86% 33,258 85.40%
Depreciation and 1,345 3.41% 1,278 3.13% 1,173 3.01%
amortization
SG&A 1,697 4.30% 1,664 4.08% 1,668 4.28%
Interest expense, net 82 0.21% 93 0.23% 70 0.18%
Equity income (178) -0.45% (277) -0.68% (261) -0.67%
Other expense, net 240 0.61% 63 0.15% 39 0.10%
EBIT 2,223 5.64% 2,951 7.23% 2,999 7.70%
Income taxes 591 1.50% 619 1.52% 744 1.91%
Net income from 1,632 4.14% 2,332 5.71% 2,255 5.79%
continuing operations
Income (loss) from 0 0.00% 0 0.00% 0 0.00%
discontinued
operations, net of tax
Net income 1,632 4.14% 2,332 5.71% 2,255 5.79%
Loss (income) 133 0.34% (36) -0.09% (49) -0.13%
attributable to non-
controlling interests
Net income $ 1,765 4.48% $ 2,296 5.62% $ 2,206 5.66%
attributable to
Magna International
Inc.

v
 E. Dupont Analysis

2019 2018 2017 2016 2015 2014 2013 2012

Rate of Return on Equity 14.6% 21.1% 20.4% 21.7% 22.9% 21.8% 16.4% 16.2%
Net Profit Margin 4.1% 5.7% 5.8% 5.7% 6.2% 5.5% 4.4% 4.6%
Asset Turnover 1.524 1.588 1.622 1.725 1.699 1.904 1.985 1.940
Equity Multiplier 2.317 2.325 2.175 2.208 2.159 2.091 1.866 1.809

Profitability
ROA 6.56% 9.36% 9.62% 10.09% 10.76% 10.52% 8.86% 9.04%
Net Profit Margin 4.1% 5.7% 5.8% 5.7% 6.0% 5.6% 5.5% 5.7%
Gross Profit Margin 13.7% 14.1% 14.6% 14.6% 14.2% 14.3% 13.1% 12.4%
SGA / Sales 4.30% 4.08% 4.28% 4.39% 4.51% 4.69% 4.64% 4.90%
Net Margin / OI 23.080 16.523 16.293 16.593 15.526 16.920 17.467 16.802
EBIT / OI 1.362 1.265 1.330 1.340 1.321 1.386 1.233 1.227

Operation Capacity
Operating Cycle 90.31 93.97 101.62 94.63 95.74 93.93 86.75 90.44
Days Sales of Inventory 35.45 35.43 38.87 32.88 33.96 34.15 31.78 33.93
Days Sales Outstanding 54.86 58.54 62.75 61.74 61.78 59.78 54.97 56.51
Inventory Turnover 10.15 10.10 10.48 11.60 10.36 10.93 11.76 11.86
Receivables Turnover 6.32 6.17 6.06 6.28 5.80 6.32 6.95 6.72
Current Assets Turnover 3.493 3.545 3.646 3.421 3.039 3.452 3.656 3.569
Fixed Assets Turnover 4.822 5.018 5.125 5.620 5.535 6.196 6.503 6.486
Total Assets Turnover 1.524 1.588 1.622 1.725 1.699 1.904 1.985 1.940

Capital Structure
Debt to Assets Ratio 0.123 0.169 0.140 0.140 0.130 0.057 0.021 0.025
Equity Multiplier 2.317 2.325 2.175 2.208 2.159 2.091 1.866 1.809

vi
 F. Table of Figures

Figure 1. Magna International’s Chronology 1

Figure 2. Magna’s Business Model Canvas 3
Figure 3. Auto Parts Suppliers in North America by Sales 2018 4
Figure 4. Business Segments by Sales 2019 4
Figure 5. Magna’s Global Production of Light Vehicles 2011-2019 5
Figure 6. External Revenue by Customer 2019 6
Figure 7. Asset Structure at 2019 Q4 9
Figure 8. Current and Quick Ratios 10
Figure 9. Working Capital / Total Assets 10
Figure 10. Total current assets and Net fixed assets / Total assets 11
Figure 11. Investments, Operating Lease Right of Use Assets and Intangible Assets / Total
Assets 11
Figure 12. Current liability/Total Liabilities, Total Stockholder’s Equity and Long-term Debt /
Total Liabilities + SE Equity 12
Figure 13: Total Sales by Region 2016-19 15
Figure 14: Total Sales by Region 2016-19 15
Figure 15: Total Sales by Product Group 2017-19 16
Figure 16. Share of revenue by product group 2017-19 16
Figure 17. Adjusted EBIT/Total sales by product group 2017-19 16
Figure 18. Material, direct labour, overhead, COGS 2016-19 17
Figure 19. Magna’s Cash Flow Structure 2016-19 20
Figure 20. ROE of Magna and competitors 21
Figure 21. EBITDA Margin 21
Figure 22. Net profit margin 22
Figure 23. Total asset turnover (%) 22
Figure 24. Accounts Receivable Turnover (%) 23
Figure 25. Inventory Turnover (%) 23
Figure 26. A/R turnover, inventory turnover, and revenue 24
Figure 27. Fixed asset turnover (%) 25
Figure 28. Equity multiplier 25
Figure 29: Net income forecast 26
Figure 30. Revenue growth comparison 27
Figure 31. Accounts receivable 28
Figure 32. Accounts receivable / Revenue 28
Figure 33. Expense / Revenue 28
Figure 34. Other expenses / Revenue 29

vii