On Monday, unusual options activity for Magna (NYSE:MGA) – an auto parts specialist – shot up to the top of the charts. Specifically, total options volume reached 119,018 contracts, up 1,779.92% against its trailing one-month average. Why so much interest in MGA stock? It could be a speculative bet on a resurgence.
Analysts are generally skeptical about Magna. Indeed, MGA stock carries a hold rating. Among 12 covering experts, nine of them rate shares exactly that, a hold.
However, the average 12-month forecast also stands at $60.14, implying about 22% upside potential. Therefore, it wouldn’t be unreasonable to see shares jump higher.
The upside catalyst comes down to a two-pronged tailwind. First, electric vehicle sales have waned. Several automakers are scaling back or delaying their electric transition plans. Second, sales of hybrid vehicles – which incorporate both combustion and electric power – have blossomed. Therefore, the upside potential for MGA stock is about following the logic.
EVs require far fewer moving parts, which means that auto parts suppliers might not see as much demand servicing them. Hybrids, on the other hand, generally tend to be more complicated than regular combustion-powered cars. Essentially, the current automotive landscape offers a two-for-one deal for Magna.
Valuation Requires a Rethink
Another compelling catalyst for MGA stock centers on the valuation. As things stand, Magna is already undervalued. Shares trade at a trailing-year earnings multiple of 11.89x and a forward earnings multiple of 8.38x. They’re also priced at 0.33x trailing-year revenue. All three statistics are well below that of the underlying vehicles and parts industry.
Together, the valuation is based on last year’s earnings per share of $5.49 on revenue of $42.8 billion, along with projected fiscal 2024 EPS of $6.02 on sales of $44.49 billion. However, because of the combo of the EV sector fallout and the hybrid vehicle sales bonanza, it’s more than possible that Magna could hit the upper end of financial projections.
In such a case, we would be looking at EPS of $6.50 on revenue of $45.74 billion. Therefore, MGA stock could be even more discounted than advertised.
Trade of the Day: Buy MGA Stock Call Options
For the trade of the day, I’m looking at the 21 June 2024 $50 call. On Monday, a huge volume burst of 50,054 contracts entered the position, subsequently boosting the premium of the option to $2.05. It’s a risky trade given that MGA stock closed Monday at $49.31, meaning that the option is out the money (OTM). Nevertheless, the bulls could attempt to drive the price toward approximately $53.
According to Barchart’s Trader’s Cheat Sheet, $52.90 represents a key resistance level. Assuming that the bulls could make a run to (and eventually above) $50, the aforementioned price would represent the next logical target. The beauty about the $50 call is that assuming a premium of $2.05, the contract’s intrinsic value alone would make it profitable at a stock price of $53 (total cost of $5,205 versus value of $5,300).
For long-term investors, it might also make sense to buy MGA stock in the open market. Auto market catalysts seem to support the company here.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
