Linamar Corporation

Linamar is a global manufacturer of parts and components for automotive customers.  They also have a business called Skyjack manufacturing access equipment.  Linamar has a history of being a well-managed growth company and its recent results fit that history.  The valuation (approximately 7X earnings) is supressed, along with the entire automotive complex, because investors are worried recent strong U.S. auto sales are not sustainable and endure a significant down turn.  If that downturn does happen, I think the stock already factors it in and if the downturn does not happen, the investment opportunity could be substantial.  Importantly, the Skyjack and Powertrain businesses are complementary, Skyjack does not require a lot of capital but generates good cash flow which is used to fund Powertrain.  They are also both manufacturing so they learn across both business and share best practices across the organization.

Ests:     4Q19   1Q20   FY19    FY20

Revs    1.7b     1.9       7.4       7.5

EPS      1.23     1.79     7.23     7.01

P=29.18, Div=.48, yield=1.6%, TTM EPS=7.74, P/E=6X, FY 19 P/E=6X, D/C=28%, significant WC surplus almost offsets debt

4Q19   1.15 vs 1.75 -34%, est 1.23 down from 1.40, FY19 EPS 7.08 vs 8.82 -20% 

• Mar 11, 2020, P=29.18, Mar 11, 2020, P=29.18, TTM EPS=7.08, P/E=4X, FY20 P/E=4X

• Revs -6.7% to 1.6bn, GM 12.2% vs 15.1%, OM 7% vs 9.2%, OpInc -29%

• Transportation -7.1% to 1.28bn, OM 5.7% vs 8.2%, OpInc -35.5%

• Industrial -5% to 335.9m, OM 11.7% vs 12.8%, OpInc -13.2%

• Transportation margins impacted by GM strike, lower volumes. NA content per vehicle -2.2%, EU +5.4%, Asia +12%

• Industrial margins impacted by lower access equipment and agriculture volumes

• 4Q19 CFO 502.7m vs 259.6m, FY19 CFO 1.17bn vs 691.2m, 4Q FCF 380m, FY19 670m, lowered net debt, D/EBITDA 1.5X

• Weak results expected and reflect valuation, solid cash flow generation3Q19   1.47 vs 1.83, -20%, Est 1.43 down from 1.94

• Valuation 4X earnings reflects fear of significant contraction in earnings or default, balance sheet is in solid shape.

Mid-Quarter Update – Jan 7, 2019

Updated commentary for 4Q more challenging conditions than they discussed after 3Q results, no discussion of expectations going forward.

3Q19   1.47 vs 1.83, -20%, Est 1.43 down from 1.94

• Nov 6, 2019, P=43.58, TTM EPS=7.74, P/E=6X, FY 19 P/E=6X

• Revs -5.3% to 1.7bn, GM 13.2% vs 14.9%, adj OM 8% vs 9.3%, OpInc -19%

• Transportation +0.5% to 1.36bn, OM 7.4% vs 6.4%, OpInc +15%

• Industrial -21.5% to 380.6m, OM 10.3% vs 17.5%, OpInc -54%

• Industrial impacted by poor crop conditions, stagnant commodity prices, trade tensions, lower access equipment volumes, Transportation impacted by GM strike

• Launch Book >4.4bn (was >4.5bn last year), Debt/EBIITDA 1.75X, mgmt. expects <1.5X be end of 2019 and <1X by end of 2020.  

• Stock has come down as earnings have contracted, suggesting investors fear this is structural rather than cyclical, 4Q likely to be more impacted by GM strike which is now resolved.

• Mgmt estimates sales to EVs will be almost $1.2bn by 2023 and content per vehicle will be at levels for traditional vehicles just a few years ago. 

• Mgmt discussed winning >200m in takeover work from other suppliers failing (primarily in EU)

• During softness, mgmt. is working to expand market share in Industrial for when markets recover.

• Outlook: strong launch activity to almost offset weakness, see flat to low single-digit declines in FY19 Revs with margin contraction in both segments, double digit EPS decline, expect single digit growth in FY20 due to launches and more stable end markets, margin expansion in Transport, stable in Industrial, double digit EPS growth

• Mgmt estimates industrial down mid to high-single digit declines in FY19 and FY20

2Q19   2.40 vs 2.93 -18%, est 2.68 down from 2.98

• Aug 8, 2019, P=41.26, TTM EPS 8.08, P/E=5X, FY20 P/E=5X

• Revs -3.3% to 2.09bn, GM 16% vs 17.9%, OM 10.8% vs 12.4%, OpInc -15.8% to 225.3m

• Transportation -1.3% to 1.49bn, OM 7.9% vs 9.1%, OpInc -14% to 117.8m

• Industrial -7.9% to 599.1m, OM 17.9% vs 20.1%, OpInc -18% to 107.5m

• Industrial down due to lower agriculture and scissors, partly offset by higher sales of telehandlers and booms

• Transportation content per vehicle up in NA and EU, -6.3% in Asia

• Strong CFO at 320m vs 144m, FCF 179m (expects FY19 FCF 550-700m), reduced debt by 175m, debt/EBITDA 1.73X, mgmt. expects EBITDA growth in 2H19 to bring debt/EBITDA under 1.25X by end of year and under 1X next year, 

• Mgmt expects Asia to be a significant growth area over next several years with >55% of growth from current levels already booked, much of which is from EV, they expect EV sales in China in 2023 to represent almost 25% of total sales? 

• FY19 and FY20 CapEx to be lower than FY18, at low end of normal 6-8% range.

• Outlook: For LNR, mgmt. expects flat revs in FY19 with margin contraction, single digit decline in OpInc, flat do modest decline in EBITDA but EBITDA growth in 2H. FY20 mgmt expects double digit growth in OpInc and EBITDA due to sales growth and margin expansion in transportation.  

• In 2020 will introduce automatic self-health check into Skyjack equipment.  

• Automotive industry will be in the 3rd-4th year of decline, agriculture softness due to trade/tariff issues but should see market share growth, company has done pretty well in this difficult environment and stock is cheap even in this near term earnings weakness, earnings have to fall a lot to make this an expensive stock and the company is too well positioned for that, clearly the stock has been a poor investment in the near term but there’s tremendous value especially if earnings start to recover in 2H and next year.

1Q19   2.11 vs 2.32 -9%, est 2.16 down from 2.36

• May 2, 2019, P=49.56, TTM EPS 8.61, P/E=6X, FY19 P/E=5X

• Revs +4.3% to 1.97bn, GM 15.4% vs 16.7%, OM 10% vs 11.1%, OpInc -5.6%, EBITDA -1.7% 

• Industrial +17% to 465.1m, OM 16.7% vs 15.8%, OpInc +24%

• Transportation +0.9% to 1.5bn, OM 7.9% vs 9.8%, OpInc -18

• Industrial up due to acquisition of MacDon, higher volume of scissors in EU and Asia, lower sales in NA due to customer pushouts, Opinc impacted by fx and higher materials costs

• Transportation experienced higher sales from ramping launches, positive impact from fx, impacted by lower volumes in EU related to WLTP issue previously discussed, lower diesel volumes and lower volumes in Asia (higher content per vehicle in NA and EU but lower in Asia), opinc impacted by balance of profitiability of ramping programs vs weakening legacy programs (mgmt. expects 1-2 more quarters before seeing some relief)

• Weak earnings, mgmt. discussed these issues last quarter, strong CFO (130.3m vs 35.8m), mgmt. sees FY19 EPS up mid single digits over FY18 (tempered from last quarter) with higher growth in FY20.  

• Mgmt expects high-single digit to low double-digit (above market) growth in FY19 for Skyjack, flattish in FY20 as market share growth offsets market decline.  MacDon looks soft for the remainder of the year due to market softness.  Consolidate expectations mid single-digit growth in FY19 and higher in FY20 due to strong launches and stable markets.  

• For FY19 margins, fairly flat margins compared to FY18 (14-18% in industrial, 7-10% in transportation), see margin expansion in FY20. Mid single digit normalized EPS growth in FY19 and double-digit growth in FY20, based on mgmt. guidance, FY19 EPS estimate looks ok, FY20 looks low.  

• MacDon now fully lapped so industrial growth will look more moderate, mgmt. looking to expand their sales internationally.  

4Q18   1.75 vs 1.85, -5.4%, ex fx gain, est 1.69 down from 1.85, FY18 EPS 8.82 vs 8.35, +5.6%

• Mar 11, 2019, P=50.78, TTM EPS 8.82, P/E=6X, FY19 P/E=5X

• Reported 1.88 vs 2.04, normalized 1.75 vs 1.85

• Revs +10% 1.73bn, GM 15.1% vs 16%, OM 9.2% vs 10.2%, OpInc -1.1% to 158.9m, EBITDA +2.9%, EBT -9% on higher interest expense

• GM hurt by launch costs and rising commodity prices and restr costs

• Industrial +70% to 353.4m, OM 12.8% vs 13.5%, OpInc +61% to 45.4m

• Transport +0.9% to 1.38bn, OM 8.2% vs 9.7%, OpInc -14% to 113.5m

• Indu revs up due to MacDon and share gains for scissors, seeing rising commodity prices

• Transport benefited from program launches offset by declines in Europe due to WLTP mentioned last quarter and lower diesel demand, declines in Asia, OpInc impacted by lower volumes on higher-margin mature programs, launch costs, restructuring, partly offset by launches, content per vehicle NA +1.7%, EU +4.5%, Asia -6.6%

• For FY19, mid-single digit top line growth, expect EU and Asia softness in 1H, ramping programs offsetting softness in EU and Asia and program roll-offs, Skyjack seeing some purchases pushed into 2Q but FY outlook high single-digit to low double-digit growth, MacDon flat to slightly up, expect normal launch costs in 1-2 quarters as ramps transition to prodn phase, moderate OM improvement in Industrial, improved OM in transport, normalized Net Profit Margin 7.75-8.25% vs 7.7% in FY18, lower CapEx, solid cash flow and debt repayment. 

2Q18   2.93 vs 2.55, +15% ex (.05) items and fx gain vs fx loss, est 2.80

• August 7, 2018 P=57.82, TTM EPS 8.59, P/E=8.7X, FY19 P/E=7X

• EPS excludes 9.1m fx gain vs 7.3m expense last year, benefit EPS .10 vs (.10)

• Revs +22% to 2.2bn, GM 17.9% vs 17.7%, OM 12% vs 12.6%, adj OpInc +16% to 258.4m

• Transportation Revs +7.2% to 101.7m, adj OpInc -15% to 136.9m, OM 9.1% vs 11.5% due to fire disruption at customer’s plant, some lower volumes

• Content per Vehicle: NA +2.9%, EU +15%, Asia -15%

• Industrial +80% to 289,5m due to MacDon but also double digit volume growth in SkyJack, OpInc +141% to 130.6m, OM 20% vs 15%

• Launch book almost 4.5bn

• Raising target margins from Industrial to 14-18%, previously 12-16%

• Mgmt expects MacDon to grow mid single-digit this year and low double-digit next year. For the company, expect high-single digit growth next year (current estimates are for 7.7%) and double-digit EPS growth.

• Solid results continue, stock and group still being weighed down by fears of tariffs.

1Q18   2.32 vs 2.20, ex ~.05 fx benefits, est 2.43 up from 2.36

• Revs +14.4% to 1.89bn, GM 16.7% vs 17.1%, (GM slightly up ex fx) OM 11.3% vs 11.6%, OpInc +11.8% to 214.9m but +8.4% to 209.5m ex fx revaluation of balance sheet items, fx translation of revenues and expenses hurt margins

• Transportation +9.3% to 1.49bn, OM 9.4% vs 10.7%, OPInc -4.2% due to early launch activity, -1.5% ex fx revaluation of balance sheet items

• NA auto sales +6.9% vs market -2.2%, EU +17.2% vs market +0.9%, AsiaPac +9.9% vs market -1.5%

• Industrial +38.6% to 397.5m due to 2 months of MacDon, OM 18.8% vs 15.9%, OpInc +63% but +42% ex fx revaluation on balance sheet items

• Launch book >4.4bn

• While EPS missed estimates, the stock and group continue be trading at discount valuations not representative of their growth.

4Q17   1.81 vs 1.76, est 1.73, FY adj EPS 8.09 vs 7.92

• Revs +14.5% to 1.57bn, GM 16.0% vs 16.1%, OM 10% vs 10.7%, OpInc +7.6%

• Powertrain +11.1% to 1.36bn, OM 9.5% vs 10%, Industrial +43.9% to 208.2m, OM 13.8% vs 17.0

• f/x on operating balances a significant drag on both segments’ Operating Income

• NA auto sales +4.9% vs market -5.7%, EU +21.8% vs market +8.8%, Asia Pac +12.9% vs market 1.8%

• Won 2nd e-axle program, in China, 1st in EU, combined peak volume >1m units/year.

• Subsequent to quarter end, closed 1.31bn acquisition of MacDon (Agricultural equipment)

• Outlook: see stability or moderate growth in most markets in 2018 and 2019

• Solid and impressive results and growth in moderate market, last quarter appears to be a 1-off messy quarter.

3Q17   1.76 vs 1.79 ex fx gains/losses, est 1.83

• Reported EPS 1.62 vs 1.86 but incl fx gains/losses , co says EPS ex fx and one time items +9.4%

• Revs +6.5% to 1.55bn, GM 14.9% vs 16.1%, reported OpInc -13.5% but -5.5% ex fx g/l on balance sheet items, adj OM 9.8% vs 11.0%, last year margin benefited from a recovery but amount undisclosed, fx on operating items also a drag, mgmt. says those 2 accounted for another 14.5m swing but I’m not excluding fx on operating items. Also interest expense seems unusually low this quarter.

• Powertrain +5.1% to 128.9m, OM 8.4% vs 10.1% but includes f/x g/l

• Industrial +14.1% to 260.3m, OM 12.9% vs 16.2% but includes f/x g/l

• Powertrain up despite NA light vehicle volumes -7.7%, unfavourable fx impact on revs, opinc, margin pressures from ramping programs being lower than mature programs, Content/vehicle up across all geos, seeing more outsourcing of components and systems that were exclusively in-house, see substantial opportunity in EVs, YTD 20% of business wins YTD are EV

• Continued business wins, launch book almost 4.7bn, another hybrid win in Asia, seeing interest in e-axle. Still expect high-single digit to low-double digit EPS growth in FY17, and expect double digit growth in FY18. Expect both FY17 and FY18 to have net margins ~8-8.5%

• Some discussions/concerns around NAFTA, 93% of their purchases are in NA, mostly from US.

• Messy and disconcerting quarter given the lack of clarity on adjustments but business still intact and growth continues, quote activity is “heavy”. Stepping back a bit, margins excluding items and fx are similar so the fundamental longer-term profitability is similar, this is just a noisier quarter than usual, hopefully an outlier rather than a trend.

2Q17 2.45 vs 2.39, incl .10 f/x loss, est 2.41

• Revs +6.6% to 1.77bn, GM 17.7% vs 17.6%, OM 12.2% vs 12.9%

• Powertrain +2.8% to 1.4bn, OM 11.5% vs 11.8%

• Industrial +24.5% to 361.1m due to market share gains and market growth, OM 15% vs 18.2%

• Poweretrain up despite prodn declines in core markets, higher content per vehicle. Had a sizeable e-axel program win, launch in 2020 and full volume expected at 500k p.a., continues to target doubling Asia footprint in 5 years, still have a sizable book of launch programs >4.7bn annualized sales at peak.

• Skyjack backlog is higher than last year, strong quote activity, strong interest in hybrid, battery, and fuel cell options, won their first major EV win this quarter.

• Decent results considering the overall auto market being soft, still lots of interesting growth opportunities.

1Q17   2.20 vs 1.92

• Revs +9% to 1.66bn, GM 17.1% vs 16.8%, OM 11.6% vs 11.3%, OpInc +11.7%

• Powertrain +4.2% to 1.4bn driven by Montupet acquisition, higher prodn volumes, offset by lower off-highway sales, fx headwinds, OM 10.7% vs 11.0%

• Industrial +40.9% to 286.9m, market share gains in scissors, booms and telehandlers, higher volumes due to market growth, partly offset by fx headwinds, OM 16% vs 13.8%

• Industry NA auto sales -5.3%, LNR content/vehicle -7%, EU auto sales +15.2%, content/vehicle +7.9%, Asia auto sales +25.9%, content/vehicle +22.2% (expect to double Asia footprint in 5 years), see a decline in 2018 due to shifting emission-related volume.

• Continued business wins with launch book>$4.4n vs 3.7m last year

• Seeing interest in eAxle and close to winning the first program.

• 23rd consecutive quarter of double digit operating earnings growth (expect FY17 up mid-single digits)

• See lots of potential in hybbrids and EV

• Solid quarter, results from industrial highlight that it’s not ONLY an auto supplier (while it is heavily weighted to auto, auto opinc was slightly up and growth was driven by industrial). 23 consecutive quarters is impressive as is soft U.S results offset by EU and Asia. Valuation looks classically cyclical (low P/E on “cyclically high” earnings) but the stock is 30% off its highs 2 years ago! 2 years ago investors started to anticipate a correction which hasn’t happened yet, 2 years ago TTM EPS was 5.4, the stock is down 30% but earnings are up 48%!