Down on its luck auto parts stock Martinrea International (Martinrea International Stock Quote, Charts, News, Analysts, Financials TSX:MRE) may not seem like anyone’s top pick for the year ahead, but there are plenty of reasons to like the name, says portfolio manager John Zechner, including its investment in graphene company Nanoxplore.
“I just think the auto sector looks incredibly cheap to me here,” said Zechner, chairman and founder of J. Zechner Associates, who spoke on BNN Bloomberg on Monday and called MRE one of his three Top Picks for the 12 months ahead. “We can get into the GM versus the Rivian [argument], but what I look at is it’s a parts company that’s trading at 3x operating cash flow.”
“Obviously, they’ve been hurt recently because of what’s going on with the supply chain and the chip shortage and automobile supplies in the short term from the manufacturers that has hurt these guys, but on this valuation I think these guys are well-positioned,” he said.
Martinrea, which makes steel and aluminium parts for cars like engine blocks and suspensions as well as vehicle fluid management systems, has seen its share price trickle downwards for the whole of 2021, starting at a high of $16 in January and dropping steadily from there to now the $10-$11 range.
The company is in the crosshairs of some mostly global forces impacting the costs of materials, labour and energy, as supply chain disruptions worldwide are causing delays in shipments and inflation is upping the price of goods. Labour shortages have also impacted Martinrea, altogether making for a challenging year.
President and CEO Pat D’Eramo laid it on the line in a press release earlier this month to mark the company’s third quarter 2021.
“Visibility remains low, as quite often we receive only short notice from our customers who ‘call off’ production at the last minute based on their own diminished line of sight on supply chain issues. This makes it difficult to adjust labour costs given the low lead times on production stoppages, particularly in the context of the current hot labour markets, where if you lay people off, even short term, there is a good chance they will not return. These challenges are amplified in plants that are undergoing new program launches,” said D’Eramo.
The Q3 financials showed total sales down 12.6 per cent year-over-year to $848.5 million and adjusted EBITDA of $44.9 million compared to $134.2 million a year earlier. Adjusted EPS was a loss of $0.21 per share compared to net income of $0.57 per share for the Q3 2020.
At the same time, the company held steady on its dividend at $0.05 per share on a quarterly basis, currently representing a yield of about 1.9 per cent. And management remains upbeat on the road ahead, saying production volumes will improve over 2022 and then increase into 2023. With the third quarter report, management stuck by its earlier forecast of between $4.6 and $4.8 billion in annual sales for 2023 with over $200 million in free cash flow.
“Vehicle demand remains strong and vehicle inventories are at record lows, so the longer-term outlook is very good,” said D’Eramo. “As we move into 2022 and into 2023, our plant launch activity and the costs that go along with it are expected to normalize. These launches are expected to generate future sales growth outpacing industry production growth over a multi-year period as well as strong margins once supply bottlenecks are removed and production normalizes.”
“Our future is bright and our team continues to manage well under challenging circumstances,” he said.
Martinrea has done well so far with its investment in Nanoxplore (Nanoxplore Stock Quote, Charts, News, Analysts, Financials TSX:GRA), whose share price has doubled this year. The Montreal-based company is a supplier of graphene powder to industries like transportation, packaging and electronics and has Martinrea as both an investor with 22 per cent ownership of Nanoxplore and partner, with the two companies working on graphene applications for brake linings and, announced this past April, on manufacturing electric vehicle batteries enhanced with graphene through a joint venture called VoltaXplore.
“Graphene will be a differentiator by improving charge time and vehicle distance, ultimately bringing solid state battery technology to market sooner. Combining our advanced lightweighting technologies with graphene-enhanced batteries is a big step forward in the EV space,” said D’Eramo in a press release.
Overall, Zechner said the optics looks good for Martinrea going forward.
“They’re into the light-weighting of vehicles and they also have a investment in Nanoxplore, the graphene producer, who are probably worth about three bucks per share on Martinrea,” he said. “So, when I look at an $11 stock with $3 per share of that valuation and the rest of it trading probably 3x operating cash flow, I think they’re well positioned for when this industry turns around.”
“You’ve got cheap and with growth potential,” he said.