Wednesday, September 25, 2019

Linamar Re-Visited

I've been following auto parts manufacturer Linamar for over a decade, but I hadn't owned any shares until last month. Its price finally fell to a level at which I believe I'm getting the kind of large margin of safety that interests me.

About half of the company's profit comes from auto parts (Linamar makes transmissions for the car makers), while the other half comes from farm equipment. Both of these industries have been hit hard by recent trends. Car sales are down, entering their fourth year of recession, while agriculture has also been suffering due in large part to the trade wars.

Despite this, Linamar has impressively maintained its profitability, both by improving its efficiency and by making market share gains.

But the stock price is another story. The stock price is down 50% from its 2015 high, even though revenue and profits are about 50% higher!

As a result, EV/EBIT is in the mid-single digits. Management is unhappy about the stock price, and therefore has decided to reduce EV even further. They plan to reduce debt drastically using operating cash flow this year, but as the stock price has fallen, they have also been applying their capital towards buying back shares.

There is a long-term risk that Linamar gets left behind on the auto parts side as cars continue to shift towards electric. Interestingly, this was an issue I raised in article I wrote about the company 11 years ago, and still gas-powered cars dominate the market, demonstrating how slowly things change sometimes. But as electric car sales continue to grow market share, Linamar is positioning itself to continue to play a role in the new market, as its global content per ICE vehicle grew to $55 in 2018.

I don't know what will happen in the short-term. Recessions, trade wars and other events could keep things depressed. But in the long-term, this seems like an excellent bet to me, so I bought some.

Disclosure: Author has a long position in shares of LNR

1 comment:

Miguel Neto said...

Dear Barel,

And if I'm correct, car manufacturers are outsourcing more and more to companies with know-how like Linamar. Would this not be counter some of the inherent cyclicality?