08/05/2011 05:20 EDT | Updated 10/05/2011 05:12 EDT

Magna shares tank on lower than expected earnings, profit margin guidance

AP File

TORONTO - Shares in Magna International Inc. took a 12 per cent hit Friday after the auto parts giant reported weaker-than-expected second-quarter earnings and cut its profit margin outlook slightly for the year.

Magna's stock fell $5.17 to $38.80, with 4.9 million shares changing hands. Earlier, shares plunged 21.4 per cent on the Toronto Stock Exchange on a day the entire index experienced significant declines.

Before markets opened, Magna (TSX:MG) reported second-quarter net income of US$282 million, or $1.15 per share, down from US$294 million, or $1.30 per share, in same quarter of 2010.

Excluding unusual items, Magna's profit fell by $43 million in the quarter, the company said.

Analyst estimates had been for earnings $1.32 per share, according to Thomson Reuters.

The Aurora, Ont.-based company, which reports in U.S. dollars, also forecast operating profit margins of five per cent this year. That was down slightly from its previous forecast of margins in a range of between five and 5.5 per cent.

The earnings miss was primarily driven by higher-than-expected costs and weak execution, with its profit margin at 4.8 per cent, lower than the 6.1 per cent margin analysts had expected, auto analyst Tasneem Azim at UBS Investment Research wrote in a note.

"We expect to see downward pressure on the stock, which could potentially be exacerbated by another broad market sell-off today. Following the Q2 miss and lower margin guidance, we expect consensus (estimates)/valuation to move lower," he said.

Magna's cost of goods sold increased $1.4 billion during the quarter to $6.5 billion, compared to $5.1 billion in the same quarter of 2010. The cost of goods sold as a percentage of total sales grew to 88.3 per cent from 86.4 per cent in the year-earlier.

The increase was largely due to higher commodity costs, operational inefficiencies, an increase in complete vehicle assembly sales, which have a higher material content and higher employee profit sharing.

Depreciation and amortization costs also added $172 million to the loss — $10 million more than a year ago — largely due to an increase in U.S. dollar depreciation and the relative strengthening of Canadian dollar and the euro.

During the quarter, Magna booked a $9-million writedown on real estate, which amounted to a hit of four cents per share.

Magna and other auto parts companies are feeling pressure from the loonie's continued strength, which is driving Canadian labour costs higher and making Canadian parts more expensive for other countries.

The bright spot for the company came in its revenue figures, which were 24 per cent higher than a year ago, with sales of $7.3 billion. Analysts had been expecting $6.93 billion in revenue.

The better revenue came as demand for parts in the global auto industry picks up. Vehicle production increased two per cent in Western Europe but was relatively flat in North America from the second quarter of 2010.

Sales in production, complete vehicle assembly, tooling and other sales all increased in the second quarter.

Complete vehicle assembly sales increased 23 per cent or $728 million for the second quarter, while volumes grew 57 per cent to about 35,000 units.

The company also raised its 2011 guidance and now expects between $27.5 billion and $28.9 billion in total sales, compared to between US$27.1 billion and $28.5 billion projected in the first quarter.

Also on Friday, a division of the company, Magna Exteriors and Interiors, announced it will expand its footprint in China through a 51 per cent stake in a joint venture to purchase an injection molding and painting facility in Wuhu in southeastern China.

Founder Frank Stronach, the tool and die maker who went on to build a multibillion-dollar international auto parts empire, stepped down as chairman of Magna International Inc. (TSX:MG) after the company's annual meeting in April. Former Ontario premier Mike Harris replaced him.

In June, Stronach sold more than six million Magna shares for proceeds of less than $300 million cash.

The 78-year-old has been selling shares gradually since last fall when regulators and the Ontario Superior Court approved a controversial $863-million deal to buy out his multiple-voting shares.