Lear Has More Fuel In The Tank

4/20/2015


  Recent Price
$114
  Dividend
$1.00
  Yield
0.9%
  P/E Ratio
14
  Shares (millions)
81
  Long-Term Debt as % of Capital
33%
  52-Week Price Range
$115.38 - $75.05

Shares of S&P 1500 auto-parts and equipment suppliers have averaged an 8% total return this year, doubling the broader index's 4% average return. With global vehicle production expected to rise 2% in 2015 on surging demand in China and India, the environment for auto parts remains attractive. Shares of Lear ($114; LEA) have returned 17% so far this year, yet they still look cheap and offer superior growth prospects. With both Quadrix sector-specific ranks at least 98, Lear is a Focus List Buy and a Long-Term Buy.

Auto recovery still cruising

By increasing the average amount of content it supplies per vehicle, Lear has grown sales more than twice as fast as auto production over the past five years. The global outlook for vehicle production remains solid, while the U.S. enjoys both rising production and strong pricing.

In March, the number of vehicles sold in the U.S. rose 6% from February levels and nearly 1% year-over-year, helped by low fuel prices. The U.S. is Lear's largest geographic market, accounting for 21% of its 2014 revenue. Ford and GM combine for about 43% of Lear's sales.

Lear's 2014 growth was driven by its seating unit (75% of 2014 sales, 54% of 2014 earnings), with revenue up 11%. The electrical unit (25%, 46%) posted 5% higher revenue. Lear's operating profit margin rose to its highest level since 2000 on improvement at both units. Management expects profit margins to expand further in 2015, partly helped by the January acquisition of an automotive-leather supplier for $850 million.

Earlier this month, Lear lowered its 2015 sales guidance to a range with a midpoint of $18.25 billion (up 3% from 2014), down from a prior midpoint of $18.75 billion. Management said stiffer foreign-currency headwinds will more than offset increasingly favorable volumes and a more lucrative product mix. But Lear remains comfortable with its profit outlook, partly because of lower commodity prices. Free cash flow is projected to grow more than 10% this year.

Too cheap to ignore

The consensus estimate projects Lear will grow per-share profits 17% this year, versus median growth of 10% for S&P 1500 auto-parts and equipment suppliers. Lear trades at 12 times estimated 2015 earnings, well below the industry median of 17.

Citing Lear's lagging valuation, an activist investor proposed in Feb-ruary the separation of the seating and electrical businesses into two publicly traded companies. Lear said it will consider the suggestion. The company has supported activist investors in the past. The board voted to sell Lear to Carl Icahn for $2.9 billion in 2007, but shareholders rejected the deal. Lear's top executives and most of its board of directors assumed their current roles after the Icahn deal was rejected.

Lear may announce its decision when it delivers March-quarter results on April 24. The consensus projects per-share profits of $2.19, up 19% on 5% sales growth. 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
Dec '14
2.27
vs.
1.55
7%
99.88
-
75.05
13 - 10
Sep '14
1.93
vs.
1.45
8%
103.74
-
86.41
15 - 12
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
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
17.73
8.15
0.80
103.74
-
71.57
13 - 9
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
89
85
92
35
33
86

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


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