Stock Spotlight

Don't be leery of Lear despite slump

Recent Price
$92
Dividend (estimated)
$0.80
Yield (estimated)
0.9%
P/E Ratio
12
Shares (millions)
81
Long-Term Debt as % of Capital
25%
52-Week Price Range
$103.74 - $71.57

Lear ($92; LEA) and other auto-parts stocks have struggled since Ford Motor ($14; F) gave disappointing profit guidance on Sept. 29. Ford issued an optimistic long-term volume forecast, and the issues affecting the automaker's near-term profits should not have enough effect on suppliers to justify the recent price action. General Motors ($31; GM) offered a more favorable outlook.

Lear generates about three-fourths of its revenue from seating components and the rest from electrical systems. The company has lessened its reliance on U.S. automakers since its 2009 bankruptcy. Ford and General Motors combined to generate 44% of Lear's revenue last year, down from 55% in 2006.

Factories in the U.S. account for just 19% of annual revenue, compared to 37% in 2006. While foreign exposure has probably weighed on the shares in recent weeks, it should make for a stronger, steadier revenue stream over time. Lear, yielding 0.9%, is a Focus List Buy and a Long-Term Buy.

Wired for more growth

Global production of light vehicles is expected to average 3% to 4% annual growth through 2018, according to industry researcher IHS Automotive. North American production is projected to rise 5% this year, followed by annual growth of 2% to 3% through 2018.

Lear continues to outgrow the industry as manufacturers add more electrical components to vehicles. Since 2010, Lear's content per vehicle has risen 11% in North America and 12% in Europe. Management says hybrid and electric cars give Lear the opportunity to more than double its electrical content per vehicle. Lear's seating unit will get a boost from the $850 million acquisition of Eagle Ottawa, a leather supplier that receives 43% of its sales from Japanese manufacturers.

Lear has posted five straight quarters of double-digit sales growth. Operating cash flow and free cash flow have risen in six of the past eight quarters, and both gross and operating profit margins expanded in the first half of 2014.

Lear's share price already reflects a healthy dose of skepticism. At 11 times trailing earnings, Lear shares trade 26% below the median for S&P 1500 auto-parts and equipment stocks. It also scores in the top quintile of our research universe for enterprise ratio and the price/sales ratio — the two most effective Quadrix factors for S&P 1500 stocks over the past decade.

Conclusion

In July, Lear raised its 2014 outlook for revenue, operating earnings, and free cash flow. Industry headwinds have caused analyst estimates to dip over the past 30 days. Yet growth expectations remain robust.

Consensus estimates call for per-share-profit growth of 32% for the second half of 2014, 34% for the full year, and 17% next year. Assuming Lear only hits the lowest of the 2015 estimates (which still equates to 9% growth) and its P/E ratio remains at today's depressed level, the shares would rally 24% by early 2016.

An annual report for Lear Corp. can be obtained at 21557 Telegraph Road, Southfield, MI 48033; (248) 447-1500; www.lear.com.

 

Lear

 
Quarter
Per-Share Earnings
Sales Change
Quarterly Price Range
P/E Ratio Range
Jun '14
$2.12
vs.
$1.62
11%
$92.00
-
$79.71
14 - 12
Mar '14
1.84
vs.
1.30
10%
84.18
-
71.57
14 - 12
Dec '13
1.55
vs.
1.48
14%
83.72
-
69.39
14 - 12
Sep '13
1.45
vs.
1.29
11%
73.32
-
60.64
13 - 11

 
Year (Dec.)
Sales (Bil.)
Per-Share Earnings*
Per-Share Dividend
52-Week Price Range
P/E Ratio Range
2013
$16.23
$5.90
$0.68
$83.72
-
$46.65
14 - 8
2012
14.57
5.49
0.56
48.25
-
34.81
9 - 6
2011
14.16
5.34
0.50
57.03
-
35.60
11 - 7
2010
11.95
4.42
0.00
50.51
-
29.00
11 - 7

 
Quadrix Scores†
Overall
Momentum
Value
Quality
Financial Strength
Earnings Estimates
Performance
89
67
90
90
38
22
45

* Earnings exclude special items. NM Not Meaningful.
† Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.

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Don't be leery of Lear despite slump

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