Analysts' Choice: Lear Avoids Speed Bumps

10/12/2015


  Recent Price
$115
  Dividend
$1.00
  Yield
0.9%
  P/E Ratio
12
  Shares (millions)
78
  Long-Term Debt As % Of Capital
40%
  52-Week Price Range
$118.50 - $75.05

Like most pockets of the stock market, auto-parts makers have been weak, averaging negative total returns of 1% over the last two months. Yet shares of Lear ($115; LEA) have hummed along, returning 10% during this volatile period. The stock appears poised to keep outperforming.                

Lear furnishes cars with seats (75% of revenue) and electrical systems (25%). It offers many things we look for in a company: encouraging share-price action, robust operating momentum, and an improving outlook — all at an attractive valuation. Lear is a Focus List Buy and a Long-Term Buy.

Potholes don't slow Lear

Two dilemmas have manifested in the auto-parts industry in the past couple months.

First, economic growth is slowing in China, the largest and, until recently, fastest-growing major auto market in the world. China's car sales fell 3% in August, its third straight month of declines. Barring a big rebound in the final few months of 2015, China's auto market could experience its first contraction since 2008. China's government seems determined to keep that from happening. Last month, the government offered consumers an auto stimulus package.

Admittedly, China has helped drive Lear's growth in the past few years. At 12% of 2014 sales, Lear's exposure to China is roughly in line with other U.S. auto-parts makers. Car sales remain exceptionally strong in the U.S., Lear's largest geographic market at 21% of sales. In September, U.S. car sales jumped 16%, putting the industry on pace for its strongest year since 2000.

Second, Volkswagen's ($27; VLKAY) emission-rigging scandal has cast a pall over the industry, particularly for suppliers of diesel components. Lear has no direct exposure to the emissions troubles.

Volkswagen ranks among Lear's five largest seating customers, but not among its top five electrical clients. Volkswagen generated less than 10% of Lear's sales last year, and the fallout could steer more business toward Lear's three largest customers: Ford Motor ($15; F), General Motors ($33; GM), and BMW. Of course, the emissions scandal may be more widespread, as U.S. officials expand their probe to check for cheating among other automakers.

Hampered by the strong U.S. dollar, Lear's sales growth has decelerated in each of the past four quarters. But fatter profit margins and stock buybacks led to 34% higher per-share profits in the 12 months ended June.

Lear aims to expand its far more profitable electrical unit by pursuing acquisitions worth up to $1 billion. In August, Lear bought intellectual assets from Autonet Mobile, a developer of automotive software. Lear may pursue more deals of this nature to boost its presence in automobile connectivity and driver-assistance technology.

Lear enjoys rising analyst estimates, with the consensus targeting 14% higher per-share profits for the 12 months ending June, versus its peer-group average of 13% growth. Lear's stock trades at just 11 times estimated year-ahead earnings, a 26% discount to the industry average.

An annual report for Lear Corp. is available 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 '15
2.82
vs.
2.12
1%
118.50
-
107.80
14 - 13
Mar '15
2.28
vs.
1.84
4%
112.67
-
92.45
14 - 11
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
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
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
99
90
91
90
36
85
75

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


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