Author Topic: LNR.TO - Linamar Corporation  (Read 7988 times)

kab60

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Re: LNR.TO - Linamar Corporation
« Reply #10 on: August 25, 2018, 10:18:46 AM »
Is this the top? I don't know. Economy seems to chuck a long nicely. I agree we're probably (very?) late cycle, but in 18 months they might've earned 1/4 of their market cap and gotten leverage down to 1xebitda. Even if we have a recession tomorrow and they lose money - and have a couple of years with margins cut in half - I still don't think it looks expensive. Obviously they need to survive, but again, they don't rely exclusively on auto.

Again, thanks a bunch for the pushback.

What nags me a bit is having read Capital Returns where one message - that makes sense intuitively - is to buy cyclicals when they look expensive - not when they look cheap. But it seems like a lot of people have abandoned the space already in anticipation of a major crash.
« Last Edit: August 25, 2018, 10:22:40 AM by kab60 »


topofeaturellc

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Re: LNR.TO - Linamar Corporation
« Reply #11 on: August 25, 2018, 11:18:03 AM »
I think thatís totally fair if not the decision I would make.  I think if you want to buy something over-earning you need to be comfortable with what a stress scenario does to the cap structure and be really honest with yourself about what likely scenarios will shake you out from doubling down if real pain does hit.

I love the classic marathon capital cycle stuff but I think itís important to remember itís not just buy cyclicals in pain, itís buy them when capital is exiting the sector, ie D>capex

rb

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Re: LNR.TO - Linamar Corporation
« Reply #12 on: August 25, 2018, 05:30:58 PM »
Linamar is indeed a fine company. I don't own any because I have to hold a large position in Magna, so auto parts manufacturers out of scope. But after taking a quick look today I may actually buy some.

Basically if you mention anything to with autos, someone will scream cycle, cyclicals, top of the cycle or something to that effect. But nobody seems to be talking about valuation for some reason.  ???

So basically with Linamar you have a company that is well run. A large shareholder who's interests are aligned with the plebs and hasn't been making mistakes. Supposing we're at the top of a cycle, earnings growth peak-to-peak has been 17.5% per year and ROE (though to peak) over the cycle has been 15%. This company is trading at 6x PE and basically book value. Most businesses are cyclical and they're not trading anywhere close to 6 PE. plus we don't actually know if we're at a cycle peak or if the cycle is over.

Let's talk a bit about the cycle. The US vehicle flee is about 268 million and the average age is 11.7 years. In 2017 there were about 17.25 million vehicles sold in the US. That implies an average vehicle replacement age of 15.5 years. I know that vehicles have been getting better, but 15.5 is a quite a lot and well in excess of the average age of the fleet. So at 17 million units a year it doesn't seem like we're in a crazy, frothy part of the cycle and we're about to fall off a cliff.

But for the sake of the argument let's assume that 17 million is a peak? What should be a normal run rate for autos? 15 million units for an average replacement age of 17.9 years? At that point what would be the valuation for Linamar?  9 or 10x PE? What's really wrong with 9 or 10 PE?

UK

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Re: LNR.TO - Linamar Corporation
« Reply #13 on: August 25, 2018, 10:49:20 PM »
Re buybacks and capital allocation: they are not buying back shares, but so far LNR has succeeded to reinvest in business/acquisitions and to keep ROE constant/growing, while also diversifying, at least somewhat, from the auto disruption threats. Also LNR bought back ~5 M shares for ~65 M CAD in 2008 and Hasenfratzs between them (mostly by current CEO) increased their ownership by ~4.6 M shares (from ~25 to 33 per cent of the company) in that year. In my wildest dream for this company, in their next acquisition, they just have to go after the aerospace field:)))

« Last Edit: August 25, 2018, 11:27:01 PM by UK »

kab60

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Re: LNR.TO - Linamar Corporation
« Reply #14 on: November 29, 2018, 01:00:23 AM »
This one has taken a bit of a beating which I think is interesting considering the guidance for 2019. They expect to increase sales, margins and lower capex as well as getting to 1xdebt/ebitda in 2019. That means they expect more than 600m FCF on a market cap of 3b as well as ROIC trending higher. EV/Ebitda should approach something like 3,5x for a high quality business where management has significant skin in the game and think there's potential to quadruble the size of Macdon.

Not sure what effect the GM closures will have, but I'm buying more.

mjm

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Re: LNR.TO - Linamar Corporation
« Reply #15 on: November 29, 2018, 04:26:36 AM »
not to say that i am near as knowledgeable  as the many fine posters here, but would PCP at brk look at this business?  as i can see they are somewhat in same field and do not appear to have any overlap in business. know couple years ago meryl witmer thumbed up LNR on barron's and she is on BRK bod.

 also believe GM shut down caused some of drop last few days, but know part of shutdown involved transmission plant, which to me may be a positive as GM may consider outsourcing that work. believe that is one of  main thesis here as F, GM, etc may consider outsourcing. would appreciate any input.

kab60

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Re: LNR.TO - Linamar Corporation
« Reply #16 on: November 29, 2018, 04:40:43 AM »
not to say that i am near as knowledgeable  as the many fine posters here, but would PCP at brk look at this business?  as i can see they are somewhat in same field and do not appear to have any overlap in business. know couple years ago meryl witmer thumbed up LNR on barron's and she is on BRK bod.

 also believe GM shut down caused some of drop last few days, but know part of shutdown involved transmission plant, which to me may be a positive as GM may consider outsourcing that work. believe that is one of  main thesis here as F, GM, etc may consider outsourcing. would appreciate any input.
I think the whole business would be attractive to BRK, but I think a deal is highly unlikely. They are quiet bullish on their prospects and think the equity is way undervalued (hopefully they'll act on it post 2019).

GM closures might hit them short term, but longer term I think it's a positive. It might mean more outsourcing (which is a tailwind already), but it'll also lower GM's fixed costs so it should hold up better in a downturn and thus lessen Linamars' risk. GM and Chryslers issues were a problem in the last downturn - this time they look in better shape.

Seeing where they've taken Skyjack, I really like the acquisition of MacDon. They paid a fair price but eventually it might turn out to be a steal. I think that's a free option here.

Spekulatius

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Re: LNR.TO - Linamar Corporation
« Reply #17 on: November 29, 2018, 06:00:15 AM »
One thing to consider is that most of their powertrain business is going away or at least change with automobile electrification. I know that Linanar puts a positive spin on this, claiming it will increase their addressable market, but it does increase risk, imo.

Power train appears to be the vast majority of their business.
« Last Edit: November 29, 2018, 06:02:13 AM by Spekulatius »
To be a realist, one has to believe in miracles.

kab60

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Re: LNR.TO - Linamar Corporation
« Reply #18 on: November 29, 2018, 10:43:47 PM »
One thing to consider is that most of their powertrain business is going away or at least change with automobile electrification. I know that Linanar puts a positive spin on this, claiming it will increase their addressable market, but it does increase risk, imo.

Power train appears to be the vast majority of their business.
I think you're right, but I also expect electrification to take a long time to play out which means decent management should have a decent shot at mitigating that risk or turn it into an opportunity. They still guide 8,5-10,5b revenue in 2022 (8,5 booked so far) versus 7,7b in 2018, so midterm looks fine absent a major recession.

kab60

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Re: LNR.TO - Linamar Corporation
« Reply #19 on: December 03, 2018, 04:19:56 AM »
I think I'll get the book, but this article has some intesting bits on Linamars management and founder: https://www.guelphmercury.com/news-story/2788699-linamar-s-founding-family-is-guelph-firm-s-largest-largest-investor/ (among others, they really took advantage of the last downturn. Antifragile isn't the right word, but it's interesting nonetheless)

Another point, which is hard to quantify and not part of any thesis, but they seem to have a lot of political goodwill in Canada (recently got a fairly big R&R grant I believe). Say they do get in financial distress, I think their Canadian lenders would go a long way to help them out. Obviously don't expect that to be necessary, but would probably be trickier if their debt was bonds with lots of different investors.