Riding a wave of strong global vehicle demand, Lear Corporation (NYSE:LEA) reported solid Q4 and full-year results for 2013. The company, which supplies automotive interiors to some of the largest vehicle manufacturers in the world, saw its top line jump 11% to over $16.2 billion in 2013.  Since emerging out of bankruptcy in 2009, Lear has focused on restructuring its operations, adding new businesses and incorporating low-cost structures to improve its operating margins. The company’s business directly depends on the performances of its clients in the automotive industry, which in turn is influenced by vehicle demand all around the world. Global vehicle production rose by 4% in 2013 despite sluggish European conditions, with China crossing record-breaking unit sales of 22 million. In addition to the increase in market size, technological upgradation of cars resulted in higher electrical content per unit for Lear.
Lear’s business has been divided into two segments: the seating segment and the electrical power management system (EPMS) segment. While the seating division offers complete automotive seating systems including individual component parts, the EPMS division includes wire harness, terminals and connectors, junction boxes and wireless remote control devices installed in a vehicle.
We estimate a $78.77 price for Lear Corporation, which is around 7% above the current market price. However, we are currently in the middle of revising our price estimate to incorporate the latest earnings.
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Lear’s Largest Client GM Closes On Toyota
Sales of the company’s seating segment increased by 9% to over $12 billion in 2013, on the back of strong performances of its biggest clients. More than half of Lear’s revenue came from its top three customers: GM, Ford and BMW. GM retained its top spot in the U.S. automotive market, selling close to 2.8 million units, an increase of 7% year-over-year.  Although the company trailed Toyota in the global scenario for a second straight year, it was only 270,000 units shy of the 9.98 million units sold by Toyota.  GM’s sales rose by 4% compared to an increase of less than 2% for Toyota. As seating systems for the latter are supplied by Toyota Boshoku Corporation, one of the chief competitors of Lear, the relatively larger growth of GM bodes well for Lear.
China Sales Boosted By Volkswagen
China is one of the most crucial markets for Lear, and constituted one-fifth of the company’s revenues in 2013. While industry production in China has grown at a CAGR of 8% through 2010-2013, Lear’s sales in the country have surged by 24% during this period. This means that Lear has also been able to improve its market share in China, in addition to benefiting from growth of the overall automotive industry. A notable development has been the increase in revenue from Volkswagen, the third largest automaker in the world. Volkswagen replaced GM as the market leader in China last year, crossing record sales of 3.2 million units in the country. The automaker accounted for almost 10% of Lear’s sales last year, up from 3% in 2012, and plans to invest over $100 billion in China over the next five years to establish manufacturing facilities and develop technologies.  The Chinese automotive industry is expected to grow by 8% in 2014 as well. As Lear provides seating systems to both Volkswagen and GM, it is well placed to gain from rising car sales in China.
EPMS Segment Boosted By Demand For More Electrical Content
Due to growing demand for adding more electronically controlled functions on a vehicle, sales of Lear’s EPMS segment grew by an impressive 19% year-over-year to over $4.2 billion in 2013. A key statistic was that luxury and full-size vehicles accounted for 21% of the company’s sales last year.  Premium cars have more electronically controlled features as compared to mid or small sized cars, resulting in higher electrical content per unit for Lear. The company’s primary clients in the luxury segment are BMW and Audi, which lead the global luxury car market. While sales of BMW rose 7.5% to 1.66 million units in 2013, Volkswagen’s Audi came in second with 1.57 million unit sales. 
BMW could also take advantage of the rebounding European car market. Europe is expected to post 14 million unit sales this year, an increase of 3% year-over-year following six consecutive years of decline.  The BMW i3, a 5-door sedan urban electric car, has already sold 11,000 units since its launch in the region late last year, and has a waiting list of up to six months.
Furthermore, BMW has announced the arrival of i3 in North America in the coming months, along with the entry of its i8 model (plug-in hybrid sports car) in Japan by 2015. Encouraged by strong pre-orders of the i3, BMW also plans to introduce the i5, a mid-size electrically powered sedan, to take on the popular Tesla Model S. Compared to traditional powertrain vehicles, electric vehicles have the potential to more than double the electrical content per vehicle. Going forward, as sales of BMW’s electric cars gain traction, it could potentially increase Lear’s electrical content per unit.
Growth In Margins In Line With Guidance
Operating margins for the EPMS segment stood at 9.8%, in line with the company’s guidance. During the third quarter earnings release, Lear had expected full-year margins for its EPMS segment to range between 9.5%-10%. Due to a competitive low cost structure and steady increase in electrical content per vehicle, the company expects margins for this segment to reach 11% this year.
For the seating segment, margins stood at 4.8%, a decline of 110 basis points over 2012. The company plans to expand its seating systems business this year with the opening of its fourth facility in Romania.  A new seating plant at Iasi, known as one of the major centers for the textile industry, will aim at providing low cost seat-cover solutions for Lear with emphasis on seating surface materials, including cutting and sewing capability. The company expects operating margins of around 5.5%-6% for the seating segment in 2014.Notes:
- “Lear 8-K“ [↩]
- “GM sales in 2013“ [↩]
- “Toyota beats GM in 2013 as 10 million vehicles seen“, January 2014, bloomberg.com [↩]
- “Volkswagen to invest in China“, November 2013, wsj.com [↩]
- “Lear earnings presentation“ [↩]
- “Carmaker BMW keeps luxury top spot with record 2013 sales“, January 2013, theguardian.com [↩]
- “Global car sales seen rising to 85 million in 2014“, December 2013, wsj.com [↩]
- “Lear corporation plans to open automotive seating plant in Iasi“, November 2013, lear.com [↩]