Analysts' Choice: Lear Shares Keep Foot On The Gas

10/10/2016


  Recent Price
$124
  Dividend
$1.20
  Yield
1.0%
  P/E Ratio
10
  Shares (millions)
74
  Long-Term Debt As % Of Capital
38%
  52-Week Price Range
$127.00 - $93.54

This year is shaping up to be a tale of two halves for Lear ($124; LEA), a supplier of automotive seats (77% of sales) and electrical components (23%). In the first six months of 2016, the stock shed 17% of its value on concerns about slowing auto sales and the U.K.'s decision to leave the European Union.

But the stock was priced for a disaster that failed to materialize. Since the end of June, Lear shares have surged 22%, while the S&P 1500 Index gained 3%. Lear is a Focus List Buy and a Long-Term Buy.

Steering out a skid

Several factors have made Lear a second-half stock story.

In July, Lear trimmed its 2016 guidance for revenue (now projected to rise 2% to 3%) but raised its outlook for operating earnings (up 11% to 15%) and free cash flow (up 8%). The new guidance echoes Lear's track record of delivering consistent growth in a sluggish global environment. Sales have risen in 16 consecutive quarters, while both operating cash flow and free cash flow have climbed by double-digits in each of the past five quarters. Operating profit margins have expanded in 10 straight quarters.

Although auto sales have slipped in the U.S. (about 23% Lear's sales) in recent months, they remain strong in Europe (about 40%), and China (12%). Encouragingly, U.S. demand for bigger models continues to rise, amid low fuel prices. Large vehicles, crammed with more seats and electrical features than passenger cars, tend to be more profitable for suppliers. 

In August, Lear seemed confident that U.S. auto sales had yet to peak, citing the increasing population and higher incomes. Even if auto sales are leveling off, management expects higher demand for premium features, such as climate-control seats and audio-equipped headrests.

Lear has seen little fallout from Brexit. So far, demand remains stable in the U.K., which accounts for 8% of Lear's sales. About 70% of its U.K. revenue is denominated in euros, limiting currency risk. 

Lear says the shift toward 48-volt systems from the traditional 12-volt could create a significant opportunity to add more electrical content in vehicles. Automakers are beginning to test 48-volt electrical systems to better satisfy the power demands of autonomous vehicles and meet future emissions standards. Lear expects to outgrow the auto-parts market by five percentage points over the long term.

Conclusion

Earning a Quadrix Value score of 96, Lear still looks like a bargain. At 10 times trailing earnings, the stock trades 10% below its five-year average and 26% below the median for S&P 1500 auto-parts suppliers.

That discount looks especially enticing given Lear's superior operating momentum. Lear grew earnings per share 38% in the 12 months ended June, versus its industry median of 18%. And Lear's profits are projected to rise 22% in 2016, twice the industry norm. If Lear meets the 2016 profit consensus of $13.27 and its trailing P/E ratio climbs to 11, the shares would rally 17% to $146 by early 2017.

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 '16
3.66
vs.
2.82
2%
120.00
-
97.35
10 - 8
Mar '16
3.40
vs.
2.28
3%
122.09
-
93.54
11 - 9
Dec '15
3.20
vs.
2.27
4%
127.00
-
106.54
13 - 11
Sep '15
2.56
vs.
1.93
2%
113.65
-
89.71
12 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
18.21
10.85
1.00
127.00
-
89.71
12 - 8
2015
17.73
8.15
0.80
103.74
-
71.57
13 - 9
2014
16.23
5.90
0.68
83.72
-
46.65
14 - 8
2013
14.57
5.49
0.50
48.25
-
34.81
9 - 6
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
81
96
93
46
74
62

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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