Linamar Corporation

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Linamar Corporation

Double-digit Growth Set To Return

Our Conclusion

Linamar’s executives at CIBC’s Montreal Investor conference called out a return to double-digit growth for revenue and earnings in 2018. While we do see some upside for the shares, we maintain our Neutral view on Linamar and raise our price target to $81 (from $69). Our price target is now based on 2018E EPS, which we also increased. Our target is based on 9x 2018E EPS of $9.00. U.S. auto peers trade at ~9x 2018E EPS while Skyjack peers trade at ~17x.

Implications

Linamar’s Mark Stoddart (CTO and Executive VP Sales and Marketing) and Dale Schneider (CFO) confirmed that they expected a return to Linamar’s double-digit growth in revenue and earnings. The growth is coming from faster outsourcing that is helping Powertrain Driveline
and further gains at Skyjack. Outsourcing has accelerated as OEMs face spending pressures coming from technology demands. This in turn has led to gains in Linamar’s backlog and booked business for 2018. Skyjack also continues to gain market share across all regions
with its broader product line of telehandlers and booms.

It is also noteworthy that Linamar has been awarded its first major eaxle platform design win for a mechanical gear box. This platform program is material with content potential of $350-$750 per vehicle and targeted volumes of 500,000 units. The program will start
production in 2020 and ramp up in 2022. Linamar confirmed this program in Montreal and suggested that further design wins were likely in the coming months.

Our Neutral thesis is updated with the following three points:

1) The Powertrain/Driveline unit is benefiting from accelerated secular growth due to outsourcing. This should drive double-digit growth even if US production of light vehicles is flat. For Industrials, Skyjack should grow faster than the market rate of 5%-10%.

2) Our 2017 and 2018 EPS forecasts are revised to $7.71 and $9.00, respectively (vs. Street of $8.20 and $8.70).

3) We value Linamar at a forward P/E of 9x. While this did not change, it is higher than peers and supported by our revised outlook.