Linamar Corporation Q2 2016 Analysis

About Linamar Corporation

Auto parts manufacturer assembly line

Linamar Corporation (TSX:LNR) manufactures highly engineered products, powering vehicles, motion, work, and lives and is ranked 33rd among the top 100 automotive suppliers in North America.

It has 57 manufacturing locations, 6 research and development centres, and 21 sales offices in 17 countries in North and South America, Europe, and Asia.

Q2 2016 and half-year results

Today Linamar rose a whopping 10% after releasing its Q2 2016 results.

Linamar increased its sales by 21% to record levels of $1.66 billion and increased its operating earnings by 29% to record levels of $213.7 million compared to Q2 2015.

The double-digit growth is attributable to its Powertrain/Driveline segment, which delivered strong sales and operating earnings growth of 26.1% and 45%, respectively. This more than covered for the “meh” results from its Industrial segment, whose sales increased 2.1% and operating earnings declined 3.3%, because the Powertrain/Driveline segment contributed about 84% of the sales and 79% of the operating earnings in the first half of the year.

Valuation

Linamar is a high-growth company.

The most conservative normal P/E based on the last few years of growth indicate Linamar could trade at about $88.

  • Reuter gives Linamar a one-year target price of $62.80 based on the mean number from 8 analysts.
  • Scotiabank gives Linamar a one-year target price of $80.

Averaging the three numbers, we get an average target price of $77, indicating there could be a potential upside of 35% from the current $57 level.

Caution

LInamar is a cyclical company.

Investors should note that Linamar is a cyclical company, so it could grow its profitability rapidly for a number of years (just like it has since 2009) but it could also decline in another period (e.g. 2007 to 2009).

Conclusion

In the first half of the year, Linamar posted record sales of $3,175.3 million–20% higher than the $2,645.6 million generated in the same period in 2015. Linamar’s operating earnings were $385.8 million — also 20% higher. Further, Linamar’s gross margin increased by 19.7%.

At $57, Linamar trades at a forward multiple of 7.5, with a potential upside of 35%. So, investors looking for growth can consider it as a growth opportunity, especially on pullbacks. That said, Linamar also pays a small dividend of less than 1%.

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Disclosure: At the time of writing, I own shares in TSX:LNR.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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