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Topic: Value Stocks

Canadian stock aims to reap the benefits of big acquisition

This Canadian stock has a strong niche in the auto industry, and recently expanded its operations in another area.

It made a big acquisition that will enlarge its agricultural equipment business globally and add to earnings immediately. In North America, the company faces some uncertainty over the outcome of NAFTA negotiations. In the meantime, it trades at a low 7 times projected earnings for 2018.


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LINAMAR CORP. (Toronto symbol LNR; www.linamar.com) makes a variety of automotive parts, including cylinder heads, cylinder blocks, camshafts, crankshafts and connecting rods. It also makes self-propelled, scissor-type work platforms under the Skyjack brand as well as other machinery for industrial clients.

In the three months ended December 31, 2017, Linamar’s overall sales rose 14.5%, to $1.57 billion from $1.37 billion a year earlier.

Sales for its powertrain business (87% of the total) rose 11.1%. That’s mainly due to the launch of new products and strong demand for light vehicle parts in North America, Europe and Asia. Sales of industrial equipment (13%) soared 43.9% on higher demand for construction-related equipment in North America and Europe.

If you exclude a charge related to the new U.S. tax laws, Linamar’s earnings in the quarter improved 3.4%, to $120.0 million from $116.1 million. Due to more shares outstanding, per-share earnings rose at a slower rate of 2.8%, to $1.81 from $1.76.

Value Stocks: Acquisition will reduce exposure to cyclical automakers

In February 2018, the company completed its acquisition of the MacDon Group of Companies. Based in Winnipeg, that firm makes agricultural harvesting equipment. Linamar will merge those operations with its agricultural business in Hungary. In Europe, Linamar Agriculture markets corn and sunflower heads, or harvesting attachments, through the Oros brand.

The company paid $1.2 billion for MacDon. Linamar borrowed the cash it needed for the acquisition. That will push up its long-term debt, from $1.3 billion as of December 31, 2017, to roughly $2.5 billion. That’s a high 52% of its market cap. However, the new operations will immediately add to its earnings. Moreover, they will help cut the company’s exposure to cyclical automakers.

Linamar will probably earn $10.03 a share in 2018. The stock trades at just 7.2 times that forecast. The $0.48 dividend yields 0.7%.

Our recommendation in The Successful Investor: Linamar is a buy.

For our views on making the most of undervalued stocks, read What is Value Investing? And how can it boost my portfolio returns?

For our recent report on a U.S. value stock that is making a big transition, read Internet pioneer switching focus to the ‘Internet of Things’.

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