Key Takeaways
- Canada’s auto parts manufacturers play a crucial role in the North American supply chain, with the sector contributing $16.8 billion to Canada’s GDP in 2024.
- The sector is facing competing influences, including a decline in policy interest rates, US-Canada auto tariffs, and increasing margin pressures due to global competition.
- Companies like Martinrea International Inc. and Exco Technologies Ltd. are showing upside potential based on valuation models and analyst consensus.
- Investing in the auto parts sector involves risk, and it’s essential to consider multiple valuation techniques and analyst target data to make informed decisions.
Introduction to the Auto Parts Sector
Canada’s auto parts manufacturers sit inside a tightly integrated North American supply chain, feeding assembly plants in Ontario and the U.S. Midwest with stamped metal, powertrain components, interiors, electronics, and EV and battery-related parts. The sector’s near-term performance is being pulled in opposite directions, with a decline in Canada’s policy interest rate since mid-2024 easing financing pressure for automakers, suppliers, and consumers, but demand remains sensitive to credit conditions and the overall economy.
Valuation Techniques and Results
The screen used stockcalc’s screener to select the top nine listed auto-parts manufacturers by market capitalization on the TSX. We then used stockcalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued compared with its price. The techniques used include discounted cash flow (DCF value), price comparables (price comps), and adjusted book value (ABV). If we have analyst coverage, we may consider the consensus target price. The results show that some companies, like Martinrea International Inc. and Exco Technologies Ltd., are showing upside potential based on valuation models and analyst consensus.
Company Profiles and Analysis
Let’s look at a couple of these companies: Martinrea International Inc. engages in the design, development, manufacture, and sale of engineered, value-added lightweight structures and propulsion systems for the auto sector in North America, Europe, and internationally. The company offers a wide range of products, including control arms, links, subframes, engine blocks, and transmission housings. On Jan. 15, the Vaughan, Ont.-based company announced it had acquired common shares in Polyalgorithm Machine Learning Inc. (PolyML). PolyML is focused on advanced machine learning and data analytics designed to find solutions from large, complex, and information-dense data sets. Exco Technologies Ltd., together with its subsidiaries, designs, develops, manufactures, and sells dies, moulds, components, and assemblies, and consumable equipment for the die-cast, extrusion, and automotive industries. The Markham, Ont.-based company has operations in Canada, the United States, Europe, and elsewhere.
Economic Output and Employment
The Canadian Occupational Projection System estimates the automaking industry employed 176,900 workers in 2023, with 54 per cent of those in motor vehicle parts, and Ontario accounting for the bulk of that employment. From an economic-output view, the federal automotive industry profile reports a $16.8-billion contribution to Canada’s GDP in 2024, including the wider automotive manufacturing base with $9-billion attributed to the parts sector. The sector is dealing with a number of competing influences currently, including a decline in Canada’s policy interest rate, US-Canada auto tariffs, and increasing margin pressures due to global competition.
Global Competition and Trade agreements
Mexico’s cost advantage, coupled with the United States push for reshoring via incentives, and China’s scale in EVs and components are also intensifying margin pressures. Coupled with that, Canada’s new Chinese EV policy from the agreement-in-principle this month allows up to 49,000 China-made EVs a year at a 6.1-per-cent tariff rate, (rising to 70,000 over five years), reversing the prior 100-per-cent surtax adopted in 2024. In Canada, there are 150,000 to 190,000 passenger vehicles or light trucks sold each month on average. The United States-Canada auto tariffs and countertariffs and USMCA renewal and compliance rules are creating uncertainty and costs but at the same time are encouraging "made-in-North-America" sourcing.
Conclusion and Disclaimer
Investing involves risk, and it’s essential to consider multiple valuation techniques and analyst target data to make informed decisions. Stockcalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis. Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B. Globe Unlimited subscribers can subscribe to stockcalc using the promo code "Globe30", which offers a 30-day free trial and special pricing for the second month.
