We recently compiled a list of the 7 Most Undervalued Canadian Stocks To Buy According To Analysts. In this article, we are going to take a look at where Magna International Inc. (NYSE:MGA) stands against the other undervalued Canadian stocks.
The Canadian stock market experienced a notable rebound in the third quarter of 2024, following a sluggish performance earlier in the year. This resurgence was primarily fueled by a series of interest rate cuts by the Bank of Canada, which helped cool inflation and support broader economic recovery. The central bank’s actions, which included rate reductions totaling 75 basis points so far, have rejuvenated the real estate market and provided a significant lift to financial services stocks. According to a report by Reuters, the Toronto market gained 9.7% in Q3 2024, making it the strongest quarterly performance since 2019. The impact of these measures has created an optimistic outlook for the market, potentially setting the stage for continued growth in the coming months.
The third quarter proved to be the strongest for Canada’s main stock market, thanks to a combination of domestic rate cuts and rebounding global markets. Economies around the world showed signs of recovery, improving investor sentiment and benefiting Canadian equities. Financial and technology stocks were among the biggest contributors to the market’s positive performance, with financial stocks gaining 10% and tech stocks up by 12% during the quarter, according to data from Reuters.
This strong performance was driven by key players in the industry, highlighting the potential of Canadian financial and tech stocks. The financial sector also saw significant gains, supported by the large weight of financials in the Canadian index, which amplified the impact of rate relief on credit performance. The recovery was further bolstered by strong earnings reports and a pivot towards rate cuts by the U.S. Federal Reserve, which lent additional support to the Canadian market.
The impressive performance of Canadian stocks can be attributed to a combination of domestic and global factors. Analysts noted that the Bank of Canada’s rate cuts had a revitalizing effect on the real estate market, which in turn bolstered financial services stocks. Jimmy Jean, a prominent economist, pointed out that the expectation of additional rate cuts created a favorable environment for the real estate sector, allowing it to lead the market recovery.
Furthermore, the Canadian stock market benefited from a broader global recovery, as investor sentiment improved in tandem with solid earnings reports from international markets. In this context, Canada emerged as one of the best-performing markets worldwide in the third quarter, following a period of underperformance in the second quarter.
As the outlook for the remainder of the year unfolds, analysts anticipate that if the Bank of Canada continues its rate-cutting strategy, the positive momentum could persist. Lower mortgage rates are expected to alleviate borrowing costs for households, stimulating demand for housing and further strengthening the real estate and financial sectors. However, challenges remain, particularly in light of geopolitical tensions that could impact oil prices and the energy sector. Despite these concerns, the overall sentiment surrounding Canadian equities remains cautiously optimistic, with a focus on identifying undervalued stocks poised for growth in this evolving market landscape.
With these factors in mind, this article delves into the seven most undervalued Canadian stocks that analysts recommend for investors seeking opportunities in this recovering market.
Our Methodology
For this article, we used the Finviz stock screener to identify all the companies operating out of Canada with a forward Price-to-Earnings (P/E) ratio of less than 15 as of October 7, 2024. We then reviewed the price targets set by analysts for each stock and compared them to their respective closing prices on October 7 to evaluate the upside potential. Additionally, we analyzed data from approximately 912 elite hedge funds tracked by Insider Monkey during the second quarter of 2024 to assess hedge fund ownership of each company. The stocks are ranked in ascending order based on their upside potential.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An assembly line of light trucks in a state-of-the-art manufacturing plant.
Magna International Inc. (NYSE:MGA)
Upside Potential: 17.07%
Forward Price to Earnings (P/E) Ratio: 6.67
Number of Hedge Fund Holders: 16
Magna International Inc. (NYSE:MGA), headquartered in Aurora, Canada, is a leading global supplier to the automotive industry. The company specializes in designing, engineering, and manufacturing a broad range of vehicle components and systems. Operating through four distinct segments, Body Exteriors & Structures, Power & Vision, Seating Systems, and Complete Vehicles, Magna International Inc. (NYSE:MGA) serves original equipment manufacturers (OEMs) of cars and light trucks worldwide. Founded in 1957, Magna has grown into a key player in the industry by delivering comprehensive solutions in body structures, electric drive systems, seating components, and vehicle manufacturing.
In the second quarter of 2024, Magna International Inc. (NYSE:MGA) reported consolidated sales of $11 billion, aligning with its sales figures from the same quarter last year. Adjusted EBIT came in at $577 million, reflecting a margin of 5.3%, slightly down from 5.6% in Q2 2023. Despite the lower EBIT percentage, Magna International Inc. (NYSE:MGA) managed to generate $123 million in free cash flow, compared to a use of $7 million in Q2 2023. The company’s ability to produce strong cash flow despite a challenging market environment highlights its operational efficiency and financial resilience.
Magna International Inc. (NYSE:MGA) management has taken proactive measures to enhance profitability by optimizing its cost structure and reducing capital expenditures. In the second quarter, the company lowered its capital expenditure outlook by an additional $100 million, bringing the total reduction to $200 million for 2024. This disciplined approach is expected to maintain Magna’s free cash flow outlook in the range of $600 million to $800 million for the year.
Further strengthening its financial position, Magna International Inc. (NYSE:MGA) continues to maintain a strong balance sheet, with $3.7 billion in liquidity, including $1 billion in cash, and an adjusted debt-to-EBITDA ratio of 1.9. The company’s focus on maintaining investment-grade credit ratings and reducing leverage indicates its commitment to shareholder value.
In addition to these financial metrics, Magna International Inc. (NYSE:MGA) is capitalizing on its innovation capabilities, as seen through recent contract wins with major OEMs and successful commercialization of new technologies. These strategic moves position Magna International Inc. (NYSE:MGA) to benefit from future growth opportunities in the evolving automotive landscape, making it one of the most undervalued Canadian stocks to buy according to analysts.
Overall MGA ranks 7th on our list of the most undervalued Canadian stocks to buy according to analysts. While we acknowledge the potential of MGA as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MGA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.