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VIDEOMagna Ready to Melt?
Considering a bearish bet on the auto-parts supplier.
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I am establishing a bearish calendar-spread position in Magna International (MGA).
Specifically, I sold to open 15 May $30 puts (MGAQF) at $0.95 a contract, and bought to open 15 June $30 puts (MGARF) at $2.00 a contact
I would set a limit of a maximum of $1.15 net debit for the spread.
As usual, my thesis rests on both technical and fundamental analysis. Right now, the chart appears to have put in a top after shares left a spike at $37.50; it's now beginning to form a small head-and-shoulders pattern.
The company is considered one of the “healthiest” in the auto industry, with a relatively solid balance sheet. It isn't overly exposed to any single maker -- such as General Motors (GM) -- so a bankruptcy might not be devastating. But Magna does operate in an industry that's going through an unprecedented slowdown in sales and profitability - one that isn't likely to get much better any time soon.
Magna gets roughly 40% of its revenues from sales in North America and about 40% from Europe. Sales across both regions are expected to be about 35% during the first quarter of 2009 compared with the year ago period.
There's likely to be a more dramatic decline of 50% in Magna’s Complete Vehicle Assembly (CVA) units. CVA is when an automaker essentially outsources the total manufacturing of a complete car to Magna. Nearly 85% of CVA business is based in Europe and consists of luxury cars, such as BMW. That CVA has the highest margins, so the decline in this segment will hurt bottom-line profits.
As it currently stands, net margins slipped into negative territory in the third quarter of 2008, and are expected to remain so through 2009. To be sure, with government becoming deeply involved in the auto industry, there's likely to be increased pressure on prices from suppliers.
Using a calendar spread is a low-cost, limited-risk means of establishing downside exposure.
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