Magna investors ignore Trump’s tariff talk. They may be onto something

Add one more headwind facing Magna International Inc. MG-T: When U.S. president-elect Donald Trump announced this week that he will impose a 25-per-cent tariff on all products imported from Canada and Mexico, the Canadian-based auto-parts manufacturer looked vulnerable to the tough talk.
So why has the share price remained roughly unchanged, holding onto an impressive gain of about 20 per cent over the past 11 weeks? Perhaps markets are telling pundits to relax.
The prospect of tariffs disrupting Magna’s complex global operations – which include 342 facilities in 28 countries, serving 58 vehicle manufacturers – is just one of several issues that have weighed on the company over the past few years.
It took a US$376-million charge in 2022 after shuttering its six production facilities in Russia.
Sales of electric vehicles, a segment in which Magna has a substantial investment with parts such as battery enclosures, have not been living up to expectations. More broadly, light-vehicle production – Magna’s bread and butter – is in a global slump, falling 4 per cent in the third quarter year-over-year.
Magna’s share price has been struggling with these challenges. From a high above $125 in mid-2021, the stock fell by as much as 58 per cent by August, 2024.
Since then, Mr. Trump has won the U.S. presidential election, and his harsh rhetoric on tariffs has edged toward actual policy, raising additional uncertainties for the interconnected North American automotive sector, which has virtually ignored borders for decades.
“It’s important to consider that, for close to 30 years, the sourcing of light vehicles and their downstream components – the whole value chain – has not viewed Canada and Mexico as separate countries,” said Mike Wall, the executive director of automotive analysis at S&P Global Mobility, in an interview.
Curiously, though, Magna’s share price has rebounded from its August lows, suggesting that investors aren’t too worried.
The stock’s cheap valuation, based on price-to-earnings and price-to-book ratios, implies that a lot of bad news has been priced in.
Interest rates may be working in Magna’s favour as well. As central banks cut their key rates in response to tamed inflation, lower borrowing costs should help stimulate vehicle sales.
A third factor: Magna has been adept at navigating the difficult environment for vehicle production. With its most recent quarterly results, released earlier this month, the company forecast relatively stable profit margins and announced it would buy back its own shares and pay down debt. The share price bounced 6.5 per cent on the day the quarterly results were released.
That was before Mr. Trump made his tariff announcement. Since then, Magna hasn’t commented publicly on the potential impact on its global operations and did not immediately respond to The Globe and Mail’s request for comment.
But at the Barclays Global Automotive and Mobility Tech Conference on Nov. 21, a top Magna executive did address the theoretical issue of tariffs – and didn’t sound particularly rattled.
Patrick McCann, Magna’s chief financial officer, wondered whether tariffs would hit vehicles or parts. In any case, if Mr. Trump wants tariffs to encourage production to move back to the U.S., he mused, it would be nearly impossible to achieve such a complex shift over a four-year period.
“Those are all the things that are up in the air, and I don’t have a crystal ball,” Mr. McCann said.
For now, investors appear to be okay with that. Magna’s share price, though down sharply over the past few years, is hovering just below a six-month high. And major equity indexes, including the S&P 500 and the S&P/TSX Composite Index, rallied to fresh records this week.
The leading theory is that optimism over Mr. Trump’s tariff threat isn’t misplaced: The incoming president would prefer to win concessions on illegal immigration and drug smuggling. What’s more, the optimistic case rests on 2016, when Mr. Trump made similar tariff threats prior to the start of his first presidential term. Back then, negotiations prevailed and stocks gained.
Indeed, Magna’s share price rallied 31.4 per cent from election day 2016 through election day 2020, not including dividends. That was well ahead of the 8.8-per-cent gain for the S&P/TSX Composite Index over the same period.
At the very least, this outperformance suggests that investors can do well by tuning out the bluster from the White House over the next four years and focus instead on how Magna is responding to challenging operating conditions. The headwinds are still there, according to the bullish case, but so is a cheap stock.