Analysts set higher TP for Martinrea... Citing its execution, margin improvement and free cash conversion, Raymond James analyst Michael Glen raised his recommendation for Martinrea International Inc. to “outperform” from “market perform” following the release of stronger-than-anticipated third-quarter results after the bell on Tuesday.
The Vaughan, Ont.-based auto parts manufacturer reported revenue of $1.2-billion, exceeding the $1.1-billion estimate of both the analyst and the Street. Driven by its performance in North American, earnings before interest, taxes, depreciation and amortization of $140.2-million easily topped estimates ($123.2-million and $119.7-million, respectively),
“Overall, we view the results as quite positive given this is the third consecutive quarter Martinrea has demonstrated a shift away from the considerable challenges and headwinds that faced the business during 2021,” said Mr. Glen. “While some of these challenges were related to component/chip shortages that impacted customer volumes (which are still lingering but have eased), MRE results had further been hampered by heavy program launch costs (i.e., Jeep Grand Cherokee/Wagoneer, Ford Mach-E, Nissan Pathfinder/Rogue). Management guidance through 2022 has consistently pointed to an easing of such launch costs, and we have clearly seen this come through in the reported numbers. This has been coupled with some degree of success in terms of negotiating concessions with customers to cover higher input costs [of which the most significant is in energy (we believe in Europe)].”
With the results, Martinrea raised its 2023 guidance, expecting sales of $4.8-$5.0-billion (from $4.6-$4.8-billion), a 6-7-per-cent operating margin (versus 8 per cent) and $150-$200-million in free cash flow ($20--million).
“Although we continue to view the free-cash target as aggressive — and we forecast more conservatively (RJL 2023 estimated FCF = $116-million) — we must acknowledge improving visibility on the guidance coupled with very strong messaging and focus toward free cash conversion,” he said,” said Mr. Glen. “Even on our lower FCF forecast, our implied 2023E FCF yield is 16 per cent. In that regard, with the stock currently trading at 3.8 times our revised 2023 EPS, and more recently lagging its auto parts peers through October, we are upgrading.”
His target for Martinrea shares jumped to $13.50 from $12. The average is $14.33.
Other analysts making changes include:
* Scotia Capital’s Mark Neville to $13 from $12.50 with a “sector perform” rating.
“On a sequential basis, adj. EBIT was up 54 per cent on (only) a 7-per-cent increase in production sales, with the improvement driven by lower launch costs (should continue), less volatility in customer production schedules (hopefully continues), commercial recoveries (negotiations continue), and mix,” said Mr. Neville. “The Negative: management updated its 2023 outlook, with, by our math, the mid-point of adj. EBIT guidance down approximately 15 per cent (vs. prior), due to lower assumed volumes, a slower-than-expected normalization in supply chain, continued inflationary pressures, higher interest rates, etc.”
* BMO’s Peter Sklar to $10.50 from $10 with a “market perform” rating.
“We found the quarter to be particularly strong and believe the larger contributor was Martinrea’s launch cadence with a bulge of new program launches now finally beginning to mature and contribute earnings as opposed to prior ramp losses. Notwithstanding the strong quarter and favourable earnings outlook for 2023, we find that auto parts stocks generally underperform the market during periods of Fed tightening,” said Mr. Sklar.
* CIBC’s Krista Friesen to $11 from $10 with a “neutral” rating.