LNR.TO - Linamar Corporation

[UK]

But how is that they can buy more shares than it is traded? For example on 08 22:

 

https://www.canadianinsider.com/ca-filing-details/3414450

https://web.tmxmoney.com/pricehistory.php?qm_symbol=LNR

 

I am sure there must be simple explanation:)

 

 

 

 

[Spekulatius]

But how is that they can buy more shares than it is traded? For example on 08 22:

 

https://www.canadianinsider.com/ca-filing-details/3414450

https://web.tmxmoney.com/pricehistory.php?qm_symbol=LNR

 

I am sure there must be simple explanation:)

 

Probably a brokered transaction off the exchange. The flat price ($41) above market indicates such. Your full service investment bank is happy to help you.

[kab60]

Turtle Creek wrote a pretty thoughtful investor letter once about how Canadian companies are in a much worse spot when it comes to buybacks versus American peers, since they're allowed to buyback a smaller portion of the daily volume. If you got great management in place with a deep understanding of value and capital allocation it can be quiet terrible over the long run that one can't take advantage of a great deal when it's on offer. Mostly management buys back shares near the top (great for their options), so for most investors it's probably fine.

[UK]

More about the same: https://www.wsj.com/articles/vw-bets-future-on-electric-peoples-car-11566485267

 

But:  "Ultimately, it expects to build one million electric cars with this technology by 2025 and a total of 15 million before upgrading the vehicle’s core technology."

 

So according to this by 2025 electric cars would be only around 10 per cent of total annual VW output?

[kab60]

More about the same: https://www.wsj.com/articles/vw-bets-future-on-electric-peoples-car-11566485267

 

But:  "Ultimately, it expects to build one million electric cars with this technology by 2025 and a total of 15 million before upgrading the vehicle’s core technology."

 

So according to this by 2025 electric cars would be only around 10 per cent of total annual VW output?

There's a lot of estimates out there.  I'd argue it's probably cheap even if ICE was dead in 10 years. But I have seen nothing that suggest that. The thing to remember is that the TAM for these guys is growing with increased outsourcing from OEM's, so even if the ICE market falls, their TAM might be growing - and then there's also the possibility of taking market share. Price has come back somewhat, but I still think it's dirt cheap for a high quality business with reasonable growth prospect, quiet a bit of optionality as well as great management with skin in the game and a focus on the longterm.

[jfan]

More market revisions in the downward direction by management

 

https://linamar.com/sites/default/files/reports/Mid%20Quarter%20Market%20Update%20October%202019.pdf

[kab60]

No doubt times are tough. Data from OEM's have been pretty poor, the GM strike isn't helping, and obviously ISM has been a disaster around the world. If the financial crisis was any guide, these Guys usually come out stronger on the other side.

[kab60]

Strong set of results from the transportation part of the business. 15% growth in normalized earnings, gaining market share and they've taken over 200m of business from struggling competitors. Guidance towards double digit earnings growth in transportation in 2020 in a flat market. In other words, they're doing quiet fine while a lot of auto suppliers are taking it to the chin.

 

Industrial/AG is struggling but still solidly profitable.

 

 

[kab60]

It seems there is some terminal value here afterall when we'll all be driving around in Teslas and oil is only used for cooking:

 

"Sales to electrified vehicles have grown between 2019 and 2023, a fantastic 10x for a compound annual growth rate of over 7%. Sales to these future-focused vehicles will be nearly $1.2 billion by that time and in terms of content per vehicle, will already in 2023, be at the level we were at in internal combustion engine vehicles only a few years ago." - Q3 CC

 

 

[kab60]

Interesting investment the other day. I like how they diversify the business. As a manufacturing conglomerate they'll always trade at a discount to SOTP, but they compound value. Despite recent runup I think it is way too cheap.

 

Linamar Announces Strategic Manufacturing Agreement and Concurrent

Investment in Synaptive Medical, Inc. to Diversify Into Rapidly Growing Medical

Biotech Market

December 10, 2019, Guelph, Ontario, Canada

Linamar Corporation (TSX:LNR) today announced that it has entered into an exclusive Strategic Manufacturing Agreement with Synaptive

Medical Inc. (“Synaptive”) to manufacture Synaptive’s patented Modus V™ and Evry™ products. Concurrently with this Agreement,

Linamar also announced a $USD 5 million equity investment in Synaptive. Terms of the investment were not disclosed.

Today’s announcement closely aligns with Linamar’s innovation and diversification strategy by bringing significant value to an innovative

early stage company for mutual growth. The deal leverages Linamar’s manufacturing expertise and infrastructure, design for manufacturing

capabilities, and supply chain management expertise to allow for rapid commercialization of Synaptive’s products. Further, the transaction

allows Linamar to participate as both a shareholder and manufacturer in the rapidly growing and dynamic medical device and biotech

market. Linamar initially plans to incubate the manufacturing of Synaptive’s products at the Linamar Innovation Hub in Guelph, Ontario.

[kab60]

Linamar Q4 out yesterday. Generated close to 700m in cash during the year which saw pretty bad results across the different division - but strong relative performance compared to peer - and they're taking advantage of the downturn. Versus a market cap 1,9b. I don't expect them to hit their guidance this year, but they nonetheless expect to grow EPS and generate a further 500-700m of FCF in 2020. Cash generated was partly a result of factoring it seems, but either way what matters right now is generating lots of cash so they can hopefully get to a point where they can take advantage of the share price.

 

Nobody gives a shit about an auto parts manufacturing when the world is on the brink of a recession and coronavirus is all over, but this is crazy cheap. They have liquidity of close to 1b for those fearing a worst case scenario (whatever that might be). And they announced they'll relaunch their buyback program in order to "strategically support the share price". No one asked what that meant during the CC, and I'm not sure I've seen that wording before. Can't really see that they should be afraid of getting poached by PE considering the large ownership stakes of management but interesting either way. Their sales and marketing boss bought a lot of shares in January at 45 versus 29 today

 

From CC:

 

Free cash flow in the fourth quarter took us to a total for the year of more than $670 million. That does exclude the Dewas project, if you recall, that we made in Q3, which was more of an acquisition. We expect to again generate between $500 million and $700 million of free cash flow in 2020. Thanks to another year of strong earnings and lower CapEx. This should bring our leverage under 1x EBITDA by the end of the year.

 

I want to emphasize the importance of a strong balance sheet and strong cash flow in somewhat uncertain economic time. We are in an excellent position to weather some economic softness and take advantage of additional takeover work and consolidation opportunities when many of our competitors simply are not. Strong cash flow also means the opportunity to return cash to shareholders. We were already in the market with our buyback earlier in the year before entering blackout, and as Dale will outline, we will be back in the market after our blackout ends with a renewed NCIB.

 

Turning to our market outlook. We are seeing soft markets in many areas this year, but a few expectations of growth. Industry experts are predicting declining global light vehicle volumes this year with 16.5 million, 20.7 million and 44.7 million vehicles expected to be produced in North America, Europe and Asia, respectively. This does mean a small uptick in North America compared to declines in Europe and, of course, a big decline in Asia, largely due to plant shutdowns related to COVID-19.

 

Industry experts are predicting on-highway medium and heavy truck volumes to be down in double digits in North America as well as Asia, but modestly up in Europe. Off-highway medium-duty and heavy-duty volumes are in a bit of a holding pattern still, thanks to trade issues as well as hold ups in terms of infrastructure spending in the U.S.

 

 

[jfan]

Kab60,

 

I think Linamar and auto stocks were hated before and now with an impending recession from reduced demand, interest in these businesses are declining even more. I noticed that there were only 2 analysts on the conference call. With usmca, tarriffs, china-Canadian spat, auto workers strike, electric and autonomous narrative and now Covid, the industry has been taking a continued beating. (Interestingly, there is some loose correlation historically between auto workers strikes and recesssion timing).

 

That being said, I think there will be continued pricing pressure to the stock price despite some clarity on these macro issues. If the gfc is a useful comparative, Linamar traded 0.3x book at the bottom after a net income loss in 2009 (cash flow was still positive that year despite a 30% drop in top line sales).

 

Linda was quite assertive that earnings would grow this year on the conference call. I think her confidence stems from their ability to takeover business from other players during these times of stress. However, she does tend to be more optimistic on these calls and her guidance tends to slightly overestimate the final outcome.

 

From a debt stand point, I believe that they are still well within their covenant restrictions.  In their 2009 statements, their credit facilities had a mandate of < 2.75x net debt/ebitda and > 3x ebitda/interest expense. They are currently at 1.5x and 15x respectively, which is similar to their position before the Gfc. I’m glad they decided to pay down their debt instead of being more aggressive with stock buybacks. I would rather they be more resilient.

 

I think I would be a buyer more towards the $18-22 range. I made the mistake of being to optimistic early on (rookie mistake).

 

 

[kab60]

Really appreciate the thoughts. I think it's impossible to call a bottom, and I've definately been too early (bought first at 50 - bought the two dips before the coronavirus and after coronavirus so average around 41). So down 18 pct. (24 pct. of portfolio).

 

But to be honest I really don't care. It's by far my biggest conviction idea. It's a high quality business in difficult sectors that despite headwinds in all three divisions is forecast to generate 1/3 of its marketcap in cash this year. There's a massive launch book. Despite ICE falling their TAM is growing. Their numbers on electric vehicles is actually quiet interesting. Either way I'd hate if I missed an investment here because I hoped for it do get even cheaper. If 1/3 FCF yield, with all divisions in a downturn, is expensive, then when does it get cheap?

 

I think the GFC was an outlier, and things are a bit different since then, but sure, it might trade down to that level. It actually dit Thursday I believe.

 

It hit 25 in early trading and then ended up 3-4 pct in a day where all other stock were red and the market fell 10 pct. It was the only stock I saw Thursday that was up.

 

Perhaps they were serious when they said they wanted to support the stock price. Or people realized it was priced for BK while it generates a massive amount of cash and has a reasonable amount of leverage. I'd also venture the business is more diversified with less concentration risk than in 2009. Plus, Skyjack and MacDon deserves a higher multiple than core auto though those are obviously in a slump right now.

 

Their customers, the OEM's, are generally also in a much better place today than back then. When/if this things start to fire on all cylinders you're probably looking at a P/E of around 3 for a double digit grower with double digit returns on invested capital. If one is afraid of a worst case where somehow these folks default (I'd say less than 5 pct. chance) I'd think you'd be alright anyway. It's a massive employer that spends a ton on R&D and apprentices in Canada, I think it's just about TBTF.

 

Obviously, that's a black swan scenario. My biggest fear is that Linda gets fed up with the valuation and takes it private when they've paid down debt. They could do a leveraged buyout with a PE Company and structure the deal so as they'd be in control and have a path towards majority ownership. I was surprised noone asked to their buyback intensions on the call but as you said, it's not very followed.

[kab60]

NCIB approved and so far American Automobile sector is set to keep the lights on while Europe OEM's have pretty much closed down. Everthing except Berkshire and this thing is getting killed in my portfolio. I'd probably prefer debt paydown instead of share repurchaces, but they know what they're doing and their liquidity situation, and if they can suppor the share price a bit I honestly wouldn't mind when the rest of my stuff gets slaughtered. :)

[jfan]

https://www.autonews.com/suppliers/linamar-plans-potential-layoffs-shutdowns-amid-pandemic-fallout

 

https://www.thespec.com/news-story/9912048-guelph-manufacturer-looking-to-start-making-ventilators-in-coronavirus-fight/

[kab60]

Company has regularly updated the market during Covid19. Obvious difficult conditions but still expect to be profitable and free cash flow positive for the year - and not break any covenants. Some insider buying as well. Surprised by their frequent communication - a lot of Companies could learn from them. They came thundering after the GFC when weaker suppliers got killed and they picked up business. Wouldn't expect anything less this time around, and perhaps their transition to making medtech equipment will accelerate. Still think it is an absolute steal for a diversified industrial with disciplined and longterm oriented management operating in cyclical businesses but with structural tailwinds. Company will be much bigger and much more valuable in 10 years.

[kab60]

For anyone interested in the Company history but also how they operate in a decentralized manner (each plant with its own P&L), their return hurdles, margin targets etc I can highly recommend the book Driven to Succeed even though it is too promotional at times.

[kab60]

Q1 results out. Looks fine considering the backdrop:

 

Free cash flow1 for Q1 2020 increased 572% to $147.1 million compared to $21.9 million in the first quarter of 2019 ("Q1 2019");

Liquidity, measured as cash and cash equivalents and available credit at March 31, 2020, improved to $1.2 billion;

 

Q2 will be ugly, but still expects to be profitable and FCF positive for the year and comply with covenants

 

Anyway, highlight is this part:

 

"The current global environment and economy is certainly a challenge but it is one that the Linamar team is 100% able to handle. Linamar is a strong, responsive, agile team with a culture perfectly suited to handle crisis. We are laser focused on cost reduction, cash generation, finding new business opportunities and supporting our global team and communities and delivering on every one of these counts. Tough times don't last but tough teams do and we are one tough team," said Linamar CEO Linda Hasenfratz.

[kab60]

I know nobody cares for a boring industrial company which actually has to invest in PP&E (despite double digit ROE and double digit growth), but Q2 results came out yesterday and were quiet fine I'd say - considering the backdrop. They dialed back capex massively, generated 170m FCF (net debt reduced 600m in a year) and had a minor loss despite revenues getting cut in half. I thought they would've been hit a lot harder by operating leverage, so I think it's quiet a testament to managements' abilities and their ability to respond extremely quickly. Oh yeah, they also keep taking share. I think they'll come charging back.

[kab60]

Seems like Christmas comes early this year for boring, cashflowing businesses. Just announced a pretty massive Q3 with earnings up y/o/y, generated plus 700m of FCF ytd (this was at a 1,5b market cap earlier this year) and issued ten year notes at 1,37%. Dividend back to normal levels.

[jfan]

Nice to see such positive results. Net debt to ebitda at 1.1 and no debt due until 2023. Cpv was also up in north America and Asia. Financial leverage risk levels much improved.

[kab60]

Yep, just went through the CC, very impressive. Expect 7-9 pct net margins next year despite still expected soft volumes. Things starting to look better at MacDon and Skyjack as well. Possibly even looking at taking over weak competitors. They've shown before they don't let a crisis go to waste.

[jfan]

Few interesting comments from the CC:

 

"Linamar's utilization of flexible, programmable equipment is the key factor in allowing us flexibility in times of market softness to continue to tool up new business without requiring significant CapEx. This is a massive advantage Linamar has in comparison with competitors, who may invest in more dedicated equipment, which, although cheaper and often require less labor, is not easy to reallocate to new programs or to scale the line to match actual capacity needs."

 

- This was an interesting comment that reduces the risk of owning fixed assets. Not a major competitive advantage but interesting to see how they think about managing their assets over time.

 

"I think it's also critically important to point out that the type of equipment utilized in machine parts for electrified vehicles is literally identical to the equipment using machine part for internal combustion engine vehicles. Electric vehicles use gears, shafts, structural parts and a variety of housing, just like internal combustion engine vehicles. A gear grinder or shaper used to make a gear for an internal combustion engine vehicle is the very same equipment we will use to make a gear for an electric vehicle. I highlight this point as it means we will not have significant levels of [ stranded ] assets to deal with as the world transitions into electric vehicles."

 

- This is useful in their transition to a new powertrain business

 

" I think that both dividends and share buybacks are effective means by which to return cash to shareholders. We had cut the dividend, so we thought it was a prudent first step to restore that to our shareholders. And of course, we will continue to assess dividend levels and buyback potential in the context of ongoing cash needs and leverage levels. So I think it's prudent to be conservative right now, just given there are some uncertainties in the road ahead and the current wave of the pandemic effect. So we're going to be cautious."

 

- It seems that maintaining a conservative debt level is more important than stock price returns

 

" It is charting actual booked content. So this is based on booked business. We are not putting anything in here that is speculative that we haven't won yet. So we're taking actual booked sales for programs that we've been awarded, by internal combustion, battery electric and hybrid. And then we're just dividing them by the current forecast for number of vehicles to be produced in those years for each of those propulsion types. "

 

- Can't attach the presentation chart but its on page 31. If we assume 1/3 hybrid, 1/3 ICE, and 1/3 BEV (I know this is not fully accurate) but for the sake of brevity in a post, they go from $100 CPV across all propulsion types to $170 CPV in 2024.

 

 

 

[kab60]

Yes, lots of interesting nuggets on the call. It's a secular growth story with lots of option value in MacDon and it's been trading somewhat like a cyclical cigarbutt. Their TAM is huge, and electric vehicles seem like a very interesting growth driver as OEM's will likely increase the amount of outsourced components. It's obviously cyclical, and thus lumpy once in a while, but this downturn has demonstrated just how impressive operators they are and how they can release working capital in a downturn. I expect them to emerge even leaner and meaner than pre-crisis. That's what they did in the GFC, that's what they'll probably do this time. It's still trading below book value, which is obviously not the best proxy of value, but considering they target 20 pct. ROE on their investments, it should take off if they get close to that again.

 

They could be more aggressive on share buybacks, but I think it's hard to fault them. They actually have a 100 year plan (yeah, sounds dumb) and considering most of their family wealth is tied up I expect them to continue running it conservatively and diversify even further.

 

It's funny with these cyclical industrials that are now trading above where they were in January. The outlook back then was better, and while everyone feared an downturn there wasn't really anything on the horizon. Then China flu out of nowhere, and now it seems like investors think the risk of another major downturn is unlikely since we've just gone through one. Not sure that's how it works but whatever.

[kab60]

New update out, vehicles sales better than expected and agriculture and industrials trending positively: https://www.linamar.com/sites/default/files/reports/Q4%202020%20Market%20Update.pdf

 

They're doing well, but it's still funny how the stock is almost a double since the fall of 2019. Can't say I quiet understand the pessimism back then nor the optimism right now. It's not expensive by any means, and I think it'll be worth a lot more ten years down the line, but it's crazy how fast narratives change. It was trading at 2xfree cashflow in March. Haven't sold a thing, but I liked it better in March.