BMOJanuary 31, 2023 | 18:05 ET~
Magna International MGA-NYSE MG-TSX Rating ↑ Outperform Price: Jan-31 $64.94 Target ↑ $74.00 Total Rtn 17%
Upgrade to Outperform as Inflation and Monetary Tightening Ease Bottom Line: We are arguing that we are much closer to the end of the monetary tightening cycle than to the beginning, and discretionary stocks like auto parts will outperform as it becomes clearer that inflationary trends are abating.
We now believe that there is sufficient evidence of a sustained deceleration of inflation as evidenced by the monthly U.S. CPI and that an eventual Fed easing will be incorporated into equity valuations over the coming quarters.
We now favour the auto parts stocks and are upgrading Magna to Outperform from Market Perform.
Key Points Auto Parts Stocks Should Outperform With Clarity on Inflation Peaking and Fed Outlook We find that auto parts stocks often underperform the market during periods of monetary tightening as this is clearly an interest rate-sensitive sector in terms of consumer demand for vehicles where most vehicle purchases are financed either through a loan or lease. These tightening periods typically follow periods of strong economic growth and the resultant inflationary pressures.
In Exhibit 1, we show the S&P Auto Components Index (red line) versus the Fed Funds rate (blue line). The shaded areas are the periods of Fed tightening. With the exception of the tightening that occurred from early 2016 to the spring of 2019, auto parts stocks underperformed during tightening cycles. We believe the 2016-2019 exception occurred as inflationary pressures were not as severe during that period but rather were “creeping up” and the Fed was attempting to get the Funds rate off the floor as opposed to it being a vigorous tightening cycle to stall the economy.
Exhibit 1: Fed Fund Rate vs. Auto Sector Performance Continue to page 3 for more. Key Changes Rating Target OP↑ $74.00↑ Mkt $65.00 Estimates 2023E Revenue $41,258 Previous $40,537 EBITDA $3,871 Previous $3,888 EPS $5.99 Previous $6.37