In this article, we’ll summarize a bullish thesis posted on VIC regarding Magna International Inc. (MGA) in late July when MGA stock was trading at $43. Since the publication of this thesis, MGA stock has seen a modest uptick, currently trading at $43.90. MGA stock’s forward GAAP PE ratio stands at 9.54, while it trades at just 0.30 times forward sales estimates.

The bullish narrative around Magna International suggests the market is underappreciative of its position in key automotive "megatrends," including active safety, battery enclosures, and EV-related components. It expects sales from the segment to effectively rise from 2% of total revenues in 2022 to 15% by 2027. Moreover, the company has made major inroads in these sectors, and with it consistently increasing its contributions, these investments are now close to being profitable, positioning the company for a turnaround next year.

Magna's Complete Vehicle Assembly capacity offers a unique advantage, enabling it to operate as a systems integrator and profit from OEMs' growing outsourcing requirements. With ambitions to lower its debt to targeted levels by next year, the company has been cautious in its industry EV projections, stressing its disciplined approach and keeping a fortress-like balance sheet.

Given Magna's low multiple on lower margins, the thesis points out a potential in its underpriced shares. Historically, average margins of around 6.5% to 7.8% combined with lower capital expenses and rising free cash flow should drive a notable valuation increase. Based on the present market capitalization, free cash flow is expected to reach $2 billion by 2026 and yield 15.8%.

Emphasizing employee ownership and responsiveness, the company's culture is another competitive advantage. Magna also stands to gain from its size and balance sheet strength, which should help it seize market share and consolidate suppliers in trying economic times. According to the theory, Magna's valuation may re-rate when these elements pass, with possible medium-term total returns between 25% and 70%.

Though we acknowledge the potential of MGA stock as an investment, some other AI stocks hold greater promise for delivering greater gains and doing so within a relatively shorter time frame. If you are looking for an AI stock that is more promising than MGA but trades at less than 5 times earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.