Analysts' Choice: Lear Revs Up Growth Engine

4/17/2017


  Recent Price
$133
  Dividend
$2.00
  Yield
1.5%
  P/E Ratio
9
  Shares (millions)
71
  Long-Term Debt As % Of Capital
37%
  52-Week Price Range
$149.00 - $97.35

Eight years out from the depths of the financial meltdown, it can be easy to forget how far Lear ($133; LEA) and the auto industry have come. Since emerging from bankruptcy protection in November 2009, shares of auto-parts supplier Lear have surged more than fourfold. Meanwhile, global production of light vehicles has grown 63% from its 2009 low, with production in North America more than doubling and Europe up 34%.

Lear continues to offer stronger growth and a lower valuation than most other auto-parts companies. Its business also appears well-positioned to capitalize on recent industry trends. Lear, earning an Overall rank of 99, is a Focus List Buy and a Long-Term Buy.

Lear sits in driver's seat

Lear's seating (77% of 2016 sales, 66% of profits) and electrical-systems (23%, 34%) units both grew sales 2% last year. Profit margins expanded in 2016, contributing to 19% higher per-share profits. By comparison, the average S&P 1500 auto-parts company posted 16% higher profits on 7% higher sales. For the current year, Lear is projected to deliver growth of 12% for profits (versus an industry average of 6%) and 5% for revenue (4%).

Lear's operating momentum stands in sharp contrast to an increasingly difficult U.S. backdrop. After seven straight years of growth, Toyota Motor ($105; TM) expects the U.S. auto market to post 3% lower sales in 2017. The latest data does nothing to dispel that concern. In March, the U.S. auto industry posted a seasonally adjusted annual sales rate of 16.6 million, its slowest pace in a year and well off analyst expectations of 17.2 million.

The sluggish sales have left automakers with bulging inventory levels — the average vehicle sat on a dealer's lot for 70 days last month, the most since July 2009. Additionally, defaults and delinquencies on U.S. auto loans are rising, a troubling development should the economy begin to stall.

But it's too soon for investors to flash the hazards on Lear shares, as we see a bright spot amid the gloom: Sluggish demand is concentrated in sedans, as consumers continue to flock to trucks, sport-utility vehicles (SUVs) and crossovers (vehicles built on a car platform but offering many SUV features). SUVs and crossovers represented 30% of total vehicle production last year, versus 17% in 2011. That trend favors Lear, which tends to provide more content for these vehicles.

Fortunately, Lear has limited exposure to the U.S., representing 23% of 2016 sales. A far more important market is Europe and Africa (38% of Lear's 2016 revenue). New-car registrations, a proxy for auto sales, increased 2% in Europe last month. Germany (14% of revenue) posted 11% growth in March, and underlying conditions remain favorable there. Lear generated 19% of its sales in Asia.

At nine times trailing earnings, the stock trades 13% below its five-year average and 33% below its peer-group average. If Lear meets the 2017 consensus profit estimate of $15.67 per share, and its trailing P/E ratio rises to just 11, the shares would surge 30% over the next 10 months.

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 '16
3.80
vs.
3.20
-2%
138.80
-
110.77
10 - 8
Sep '16
3.19
vs.
2.56
5%
121.78
-
98.00
9 - 8
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
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
18.56
14.03
1.20
138.80
-
93.54
10 - 7
2015
18.21
10.85
1.00
127.00
-
89.71
12 - 8
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
82
96
95
50
81
40

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


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