On the surface, auto parts specialist Magna International (MGA) appears to be an important but boring enterprise. According to its corporate profile, Magna manufactures and supplies complete automotive components. These include everything from exterior structures to powertrains to control modules and beyond. However, MGA stock has been an underperformer in the market, losing almost 17% on a year-to-date basis.
Fundamentally, one of the challenges that Magna faces is the industry’s transition to electrification. While the company’s high-voltage portfolio covers the entire product spectrum for electric vehicles – along with combustion-based hybrid vehicles – the transition involves an undesirable attribute, at least as far as original equipment manufacturers (OEMs) are concerned: EVs have far fewer moving parts than their combustion-powered counterparts.
To be sure, the reduction in moving parts is a massive advantage for drivers. Those making the switch to electrification will quickly appreciate not having to change their oil. However, this framework also means that fewer specialists (i.e. workers) will be necessary to maintain EVs. By one expert estimate, EV production will require 30% to 40% fewer workers to assemble compared to gasoline-powered vehicles.
For MGA stock, the global EV rollout means declining relevance for its core auto parts business. One of the factors that made Magna such a compelling investment idea prior to the EV paradigm was that combustion vehicles required tens of thousands of parts – large, small and everything in between.
Yes, Magna can easily transition to EVs but the business may not be as robust. Imagine an hourly wage worker getting a modest pay increase but having hours slashed substantially. Still, the troubles impacting the EV sector could be a lifeline.
Options traders appear to be taking notice, which makes MGA stock a surprisingly enticing idea.
MGA Stock Grabs the Attention of the Smart Money
Following the close of the April 22 session, MGA stock represented the top highlight in Barchart’s screener for unusual stock options volume. Specifically, total volume jumped to 119,018 contracts against an open interest reading of 9,624. Further, Monday’s volume represented a 1,779.92% spike over the trailing one-month average metric.
Drilling down into the details, call volume reached 50,517 contracts against put volume of 68,501. This pairing yielded a put/call volume ratio of 1.36, which on paper implies a bearish outlook (since more traders are engaging put options than calls).
However, Barchart’s options flow screener – which focuses exclusively on big block transactions likely placed by institutions – tells somewhat of a different story. Yes, in terms of total volume, options with bearish sentiment outnumbered those with bullish sentiment, 68,021 contracts to 50,130 contracts. Still, the bearish transaction – a $47.50 put option with a strike price of June 21, 2024 – appears to be placed by a lone institutional player looking for a short-term “negative” trade.
In contrast, the bullish sentiment trades stem from four unique transactions. The cornerstone is a $50 call with an expiration date of June 21. Based on the fundamentals, this wager appears to carry more credibility.
For one thing, MGA stock gained slightly over 2% on Monday, potentially reflecting burgeoning confidence. More importantly, Magna appears poised to attract more business thanks to the rise of combustion-based vehicles, especially hybrids.
Late last year, the Associated Press reported that more U.S. auto buyers have been turning to hybrid vehicles as EV sales declined. In particular, Toyota (TM) has been making a killing with its EVs flying out of dealership doors.
That should be a huge boost for MGA stock because hybrid vehicles are generally more complex than standard combustion-powered vehicles. The cynical translation? More expensive parts will be needed, lifting Magna’s top and bottom lines.
Economic Woes May Also Help Magna
In most cases, a challenging economic backdrop is a clear headwind for the business community. However, it’s possible that Magna could turn the troubles into an opportunity.
One of the catalysts for the EV sector fallout is the average price of the vehicles themselves. While they’ve been getting cheaper – helped in large part by the industry’s price war – they’re still expensive compared to their combustion-powered counterparts. Now, the argument has long been that over time, the total cost of ownership of EVs is lower than traditional cars.
However, the challenge with inflation is that American households need relief in the upfront department. Here, combustion cars win out – and again, that’s good news for MGA stock. So, while it may not seem like it at first, Magna is surprisingly relevant. For contrarians, it’s worth a look.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
