Steer Toward Lear's Comeback Story

4/14/2014


  Recent Price
$81
  Dividend
$0.80
  Yield
1.0%
  P/E Ratio
14
  Shares (millions)
83
  Long-Term Debt as % of Capital
25%
  52-Week Price Range
$87.19 - $50.73

Auto-parts maker Lear ($81; LEA) has yet to make any detours on its long road back from ruin. Squeezed by the North American auto downturn and a heavy debt load from a string of unwise acquisitions, Lear was one of at least 50 auto-parts suppliers to file for bankruptcy in 2009. Since then, Lear has reduced exposure to North American automakers and moved operations to lower-cost locations.

Lear has turned a profit in five straight years. In 2013, per-share profits rose 8%, revenue 11%, and cash from operations 12%. Lear also posted its fourth straight year of positive free cash flow, up 39% to $301 million. Analysts expect Lear to grow per-share profits 27% this year.

Stigma from the bankruptcy may still cling to the stock — unfairly, in our opinion. Despite enjoying robust growth, Lear shares trade at just 14 times trailing earnings and 11 times estimated 2014 profits. Both P/E ratios hover more than 26% below S&P 1500 industry medians. With both sector-specific scores exceeding 95 and an Overall rank of 96, Lear is a Focus List Buy and a Long-Term Buy.

Lear in driver's seat

Industry research groups expect global auto sales to rise 3% to 5%, with more than 5% growth in the U.S. and 10% in China. Even Europe should bounce from its 20-year low. Lear says both of its businesses, electrical (26% of 2013 revenue) and seating (74%), are growing faster than the industry. Lear estimates it provided $377 of content per North American automobile last year (up 10% from 2009) and $317 for every European vehicle (up 8%). Ford Motor ($16; F) and General Motors ($35; GM) each accounted for 22% of Lear's sales last year, with BMW third at 10%.

Lear's strongest growth comes from its most profitable unit, electrical, which posted double-digit sales gains in each of the past two years. Lear has taken share in a rapidly expanding market as cars require more electrical wiring to measure fuel efficiency and meet drivers' demands for convenience features and connectivity.

Profit margins in the seating unit have declined in 10 of the past 11 quarters, a troubling trend. In January, management blamed the decline on production inefficiencies in North America, along with currency deflation and a soft market in South America. While companywide operating margins have dipped in the last two years, Lear seems poised to widen them in 2014 and 2015.

Nearly five years after the bankruptcy, Lear's balance sheet looks solid, with $1.14 billion of cash and $1.06 billion of long-term debt. The company sold $325 million of bonds in March, with plans to use part of the proceeds to redeem bonds with higher interest rates, a move that should lower interest expense.

Stock buybacks slashed 15% from the share count last year. Lear has also grown its quarterly dividend by double digits in each of the three years since its 2011 launch. It announced an 18% hike in February.

For the March quarter, Lear is projected to report earnings of $1.69 per share, up 30%, on revenue growth of 8%. Results are due April 25. An annual report for Lear Corp. can be obtained at 21557 Telegraph Road, Southfield, MI 48033;
(248) 447-1500; www.lear.com.

LEA
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
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
Jun '13
1.62
vs.
1.35
12%
61.51
-
50.73
11 - 9
Mar '13
1.30
vs.
1.38
8%
56.70
-
46.65
10 - 8
           
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
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
61
84
88
39
89
76

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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