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Iochpe-Maxion Stock (MYPK3) – Investment Analysis

Common Stock: Iochpe-Maxion (MYPK3)

Current Market Price: R$ 12.85

Market Capitalization: R$ 2 billion

*All values in this article are expressed in Brazilian Reais (BRL) unless otherwise noted.

**The bulk of this analysis is based on the company’s most recent audited financial report, which can be found by following this link.

Iochpe-Maxion (MYPK3) - Stock Chart
Iochpe-Maxion (MYPK3) – Stock Chart

Iochpe-Maxion Stock – Summary of the Company

Iochpe-Maxion is a Brazilian automotive parts manufacturer. They have 32 manufacturing facilities in 14 countries and have around 16,000 employees. The company is divided into 2 divisions; Maxion wheels and Maxion structural components. Iochpe-Maxion was founded in 1918 and is headquartered in Sao Paulo Brazil.

Revenue and Cost Analysis

Iochpe-Maxion had total revenue of R$ 10 billion in 2019, an increase from R$ 9.6 billion in 2018. The company’s COGS was R$ 8.8 billion in 2019, representing a gross margin of 12%, a decrease from 14% in 2018.

The company was profitable in each of the past two years. In 2019 Iochpe-Maxion had net income of R$ 421.4 million, an increase from R$ 306.1 million in 2018. Their profit margin in 2019 was 4.2%, also an increase from 3.1% in 2018.

Maxion wheels accounted for 77.9% of revenue in 2019, with Maxion structural components accounting for the remaining 22.1%. The company’s revenue is split fairly equally between South America, North America, and Europe.

Iochpe-Maxion - Revenue by Region
Iochpe-Maxion – Revenue by Region

Balance Sheet Analysis

Iochpe-Maxion has a decent but leveraged balance sheet. They have sufficient liquidity and a solid base of assets. But liability levels, including debt, are high.

It is worth noting that the company has a defined benefit pension obligation valued at R$ 543.6 million as of year-end 2019. The plan is currently significantly underfunded.

Iochpe-Maxion - Pension Obligation
Iochpe-Maxion – Pension Obligation

Iochpe-Maxion – Debt Analysis

As of year-end 2019 Iochpe-Maxion has R$ 3 billion in total debt outstanding, R$ 659.5 million of which is classified as current. Almost all of the company’s debt is denominated in foreign currency, mainly the US Dollar and the Euro. The company thus has significant exposure to a depreciating Brazilian Real.

Iochpe-Maxion - Debt Table
Iochpe-Maxion – Debt Table

Iochpe-Maxion Stock – Share Dynamics and Capital Structure

As of year-end 2019 the company has 153.7 million common shares outstanding. Insiders and several institutional investors own around 45% of the company, with the remaining 55% being held by shareholders with less than a 5% interest.

Iochpe-Maxion Stock (MYPK3) - Share Structure
Iochpe-Maxion Stock (MYPK3) – Share Structure

Iochpe-Maxion Stock – Dividends

In 2019 the company paid total dividends of R$ .83 cents per share. At the current market price this implies a dividend yield of 6.5%.

Iochpe-Maxion Stock – 3 Metrics to Consider

Debt to Equity Ratio

Total Liabilities/Total Share Holder Equity

R$ 5.8 billion/ R$ 3.5 billion = 1.7

A debt to equity ratio of 1.7 indicates that Iochpe-Maxion has a leverage balance sheet and relies heavily on debt financing in its capital structure.

Working Capital Ratio

Current Assets/Current Liabilities

R$ 3.3 billion / R$ 2.6 billion = 1.3

A working capital ratio of 1.3 indicates a sufficient, but not strong liquidity position. Iochpe-Maxion should not have problems meeting its near term obligations.

Price to Book Ratio

Current Share Price/Book Value per Share.

R$ 12.85 / R$ 22.75 = .56

Iochpe-Maxion has a book value per share of R$ 22.75. At the current market price this implies a price to book ratio of .56, meaning the company’s stock currently trades at a significant discount to the book value of the company.

Iochpe-Maxion Stock – Summary and Conclusions

Iochpe-Maxion is an impressive company. They have been operating for over 100 years and with factories in 14 countries they have achieved an international presence not common among Brazilian manufacturing companies. The company was profitable in both 2018 and 2019 and their balance sheet, although leverage, appears manageable in the short term. The company’s stock currently trades at a significant discount to the company’s book value.

However I have two major concerns with Iochpe-Maxion, their high levels of debt denominated in foreign currency and their underfunded defined benefit pension obligation. Both of these factors are likely to be a drag on earnings moving forward.

I am not willing to invest in Iochpe-Maxion stock. I haven’t owned a car for almost a decade, and in my opinion the impacts of new technology like ride sharing are going to continue to impact the automotive industry for years to come. Iochpe-Maxion is an interesting company and I will revisit my investment decision based on their 2020 financials to see how their debt and pension obligations have evolved. I will be comparing the company to other Brazilian manufacturing companies with a strong international presence, such as Metalfrio.

Disclaimer

This is not investment advice. Nothing in this analysis should be construed as a recommendation to buy, sell, or otherwise take action related to the security discussed. If I own a position in the security discussed, I will clearly state it.

This is not intended to be a comprehensive analysis and you should not make an investment decision based solely on the information in this analysis. I hope this serves as a useful starting point for a more comprehensive analysis, and hopefully draws attention to aspects of the company that were overlooked or merit further investigation. This is by no means intended to be a complete analysis. Again, this is not investment advice, do your own research.

Patrick Flood, CFA