Canada Auto Parts Bull Cuts Profit Outlook as GM Strike Persists

(Bloomberg) -- Canadian suppliers to General Motors Co. are likely to report lower-than-expected profits as the strike by the United Auto Workers union enters its fourth week.

Bank of Nova Scotia analyst Mark Neville, who has street-high share price targets on Magna International Inc. and Linamar Corp., slashed his third-quarter profit estimates by about 5.5% on Magna and Martinrea International Inc. in an Oct. 4 report.

“While the estimated sales impact is significantly less, we would expect to see high decremental margins on the lost sales as the companies, in our opinion, would be unable to fully adjust the cost base,” Neville said in the report. He had cut Linamar’s forecast by 20% in an Oct. 2 report after the company issued a profit warning last week in part because of the strike.

Shares of Canada’s auto parts makers have slumped since the start of the U.S. strike last month: Linamar has dropped 13%, Martinrea lost 12% and Magna fell 6%. General Motors slipped as much as 1.8% Monday, extending its decline since the strike started to 11%.

Negotiations between GM and UAW have “taken a turn for the worse” after the union made an offer on Saturday evening, a union official said. The strike that took effect Sept. 16 has cut GM production by more than 8,000 vehicles a day, according to calculations by analysts at Credit Suisse and IHS Markit. The cost to the automaker has exceeded $1 billion, with GM losing about $82 million of potential profit in North America every day of the strike, JPMorgan analyst Ryan Brinkman wrote last week.

Scotiabank’s Neville cut Magna’s quarterly earnings per share estimate to $1.40, with the average consensus at $1.42, according to data compiled by Bloomberg. Martinrea’s forecast was reduced to C$0.50, with the street average at C$0.54.

GM is Magna’s largest customer, making up about 15% of its sales and it’s a “top customer” for Martinrea, Neville said. “While the strike is limited to U.S. workers/facilities, the impact has started to ripple through the North American supply chain,” he said.

To contact the reporter on this story: Divya Balji in Toronto at dbalji1@bloomberg.net

To contact the editors responsible for this story: Madeleine Lim at mlim131@bloomberg.net, Jacqueline Thorpe, David Scanlan

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