On the same day late last week that Telus (CA:T) reported laying off 6,000 people, Magna International (CA:MG) delivered a report revealing healthy revenue and earnings growth in the second quarter.

However, Magna shares lost ground on the news, primarily because of labor concerns raised by company CEO Swamy Kotagiri on its post-earnings conference call spooked investors.

Royal Bank of Canada economists Nathan Janzen and Claire Fan are predicting Canada will likely endure a “moderate and short-lived” recession in 2024 due to pressure brought on by stubborn inflation, higher rates, and constraints in the labor market, BNN Bloomberg reported last month.

Still, despite the potential headwinds Magna faces, the threat of a recession seems a long way off. Magna’s business is performing at a very efficient level. And that’s excellent news for shareholders of the global automotive supplier.

Magna Revises Guidance Upward

In the second quarter, Magna’s adjusted earnings per share were $1.50 (all figures in U.S. dollars), 27 cents higher than the Refinitiv average estimate from analysts. On the top line, its sales were $10.98 billion, $680 million higher than the consensus.

As a result of the healthy earnings, the company raised its 2023 revenue to at least $41.90 billion, $1.7 billion higher than its previous low end of its guidance. On the bottom line, Magna expects an adjusted annual income of $1.50 billion at the midpoint of its guidance, $100 million higher than its previous estimate.

“I am pleased with our second quarter operating performance, which reflects continued strong execution on higher organic sales and cost reduction actions being taken across the company,” Kotagiri stated in Magna’s Q2 2023 press release.

“We remain highly focused on executing our strategy and remain confident in our ability to meet our short- and long-term growth and margin outlooks.”

Body Exteriors & Structures Segment Driving Growth

In the first six months of 2023, Magna’s sales rose 14% to $21.7 billion. That was on the strength of a 10% increase in global light vehicle production. Its adjusted earnings before interest and taxes (EBIT) was $1.04 billion, 20% higher than a year earlier.

All four of its operating segments generated sales growth in the first half of the year.

However, its largest segment by revenue, Body Exteriors & Structures, experienced a 12% increase in sales and a 58% increase in adjusted EBIT in the first six months of 2023. The segment’s adjusted EBIT margin of 7.4% was 220 basis points higher than a year ago. It accounted for 41% of Magna’s revenue in the first half and 64% of its adjusted EBIT.

Magna raised its 2023 guidance for the segment to $17.6 billion at the midpoint, up $500 million from the previous estimate (February) of $17.1 billion. However, CFO Patrick McCann said during the Q2 2023 conference call that the segment’s adjusted EBIT margins would moderate during the year’s second half.

“It’s fair to say that our margin at our BES segment is going to peak in Q2 and normalize to those guidance ranges in the second half of the year,” McCann stated.

The CFO emphasized that the segment’s improving performance was due to higher volumes and execution on those volumes despite moderating margins in the second half.

Analyst Upgrades Should Help

While Magna’s share price fell on the news, it has remained positive for the year, up more than 6%.  As recently as June 2021, its shares traded over $100. They’re down by a third from those highs.

CIBC analyst Krista Friesen, who has an ‘outperform’ rating on Magna stock, raised her target price by $1 on Aug. 8 to $73. That’s nearly 20% above its current share price.

RBC Capital Markets analyst Tom Narayan believes the company’s estimates for the second half are conservative due to the possibility of a strike at one or more of its customers.

Of the 19 analysts covering its stock, nine rate it a ‘buy’, while 10 have it as a ‘hold’ and a median target price of $67.

There is no doubt that Magna faces several issues in the second half of the year that could slow its growth. However, trading at 9.2x its 2024 earnings forecast of $6.63 a share, investors buying here are getting growth at a reasonable price.

MG stock’s risk/reward proposition appears tilted in the investor’s favor.

This article originally appeared on Fintel

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