Topic: Value Stocks

Linamar’s Agricultural equipment shores up its dividends

Improved sales of equipment and automotive parts led to a 10% jump in revenue for this company during the most-recent quarter.

A recent agricultural-industry acquisition continues to reduce the firm’s reliance on the auto industry and support this solid dividend.

The stock trades at just 5.4 times the company’s 2019 earnings forecast.

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LINAMAR CORP. (Toronto symbol LNR; 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 a variety of other machinery for industrial clients.

Recently, General Motors (New York symbol GM) announced that it will close five of its North American auto assembly plants by the end of 2019. Those include the plant in Oshawa, Ontario.

However, Linamar expects those closures will have little impact on its revenue and earnings. The company supplies powertrain platforms to several GM plants in the U.S., most of which are not part of the restructuring plan.

To cut its exposure to automakers, Linamar acquired the MacDon Group of Companies for $1.2 billion in February 2018. Based in Winnipeg, that firm makes agricultural harvesting equipment. Linamar merged those operations with its agricultural business in Hungary.

Due to that acquisition, overall sales in the three months ended December 31, 2018, rose 10.0%, to $1.73 billion from $1.57 billion a year earlier. Sales for Linamar’s transportation business (80% of the total) moved up slightly by 0.9%. That’s mainly because higher demand from automakers in North America offset declines in Europe and Asia. Favourable currency exchange rates also contributed to that gain.

Value Stocks: Industrial equipment sales soar following MacDon acquisition

Industrial equipment sales (20%) soared 69.7% on the MacDon acquisition as well as on favourable exchange rates and higher demand for Skyjack platforms.

Linamar’s earnings in the quarter fell 5.4%, to $115.4 million, or $1.75 a share. A year earlier, it earned $122.0 million, or $1.85.

The company had to borrow the funds it needed to buy MacDon, and the higher interest payments were the main reason for the lower earnings.

Linamar’s long-term debt was $2.5 billion as of December 31, 2018. That’s a high, but still manageable, 76% of its market cap. It also held cash of $472.0 million.

The company will probably earn $9.39 a share in 2019, and the stock trades at just 5.4 times that forecast. The low p/e partly reflects the uncertainty over the new U.S.-Mexico-Canada free trade deal. However, it’s likely that all three countries will approve the deal later this year. Linamar also continues to pay quarterly dividends of $0.12 a share; the annual rate of $0.48 yields 0.9%.

Recommendation in The Successful Investor: Linamar is a buy.


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