China Growth And Luxury Volume Rise To Boost Lear’s Top line, Margins To Improve
Leading manufacturer and distributor of automotive interiors Lear Corporation (NYSE:LEA) is scheduled to announce its Q1 results on April 25. As Lear’s business depends on the performances of its clients in the global automotive market, we expect the company to gain from its China growth and the surge of luxury vehicles worldwide. Lear’s revenues from China have risen by an impressive 35% between 2011-2013. Vehicle volumes in China have been on a steep rise, fueled by increasing disposable incomes and rising concerns over future limitations on the number plate sales. In addition to rising unit sales, revenue per vehicle is also estimated to rise for Lear this quarter, boosted by higher sales of luxury vehicles. However, the U.S., which contributed just over 18% to the net revenues last year, might play spoilsport to the anticipated sizable rise in global car volumes. Vehicle volumes in the domestic market grew just 1% year-over-year, with Lear’s largest clients recording receding numbers. However, despite relatively flat growth, premium vehicle sales for Lear’s clients grew in the U.S., thereby contributing to higher revenue per unit and profits. Due to rising car volumes and sales per unit, the company expects net revenues to increase to $17.2 billion this year, up 6% from 2013.
The company’s business has been divided into two segments: seating and electrical power management system (EPMS). 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. According to Lear, margins will improve this year for both divisions, shirking off some inefficiencies that dragged down profitability in the fourth quarter last year.
We estimate a $84.42 price for Lear Corporation, which is roughly in line with the current market price.
See our full analysis for Lear Corporation
China Volumes On A Rise For GM, Ford, and Consequently Lear
Lear’s biggest clients are GM and Ford, both of which constituted around 44% of the net sales in 2013. [1] Both these companies have drawn considerable growth from China this year, fueled by growing consumer concerns over limitations on number plate sales. The China Association of Automobile Manufacturers had reported how eight cities might impose restrictions on the volume of number plates sold in the country this year. [2] Hangzhou and Tianjin, two of the identified cities, have gone ahead and imposed such restrictions this year in a bid to control road traffic. This caused large-scale panic for vehicle registrations in these two cities, adding incremental sales this quarter. In fact, vehicle purchases triggered by fear of number plate scarcity later on are expected to cross 500,000 units this year in China.
Through March, GM topped Volkswagen in terms of volumes in China for the first time in four quarters. Sales for GM rose 13% to nearly 920,000 units. This rise in sales is also expected to boost growth for Lear, which provides both seating and electrical content for certain GM models. On the other hand, Ford witnessed a whopping 45% rise in volumes in China this quarter. Ford overtook the auto giant Toyota in terms of sales in China in 2013, and will aim to continue adding incremental sales with the launch of its Lincoln branded cars in the country later this year.
Growing Premium Volumes To Boost Lear’s Revenue Per Unit
Despite only a 1% year-over-year volume growth in the U.S. automotive market, premium vehicles continue to grow. [3] Both GM and Ford saw unit sales fall 2% and 3%, respectively, in the first quarter in the domestic market. However, unit sales for Ford’s luxury car brand Lincoln rose 36%, whereas GM’s Buick also sold 11% more cars during this period. In addition, BMW also witnessed a 12% rise in car sales to over 70,000 units in the U.S. The premium automaker is the third largest client for Lear, constituting 10% of net sales last year. Growth of luxury car brands bodes well for Lear, as these vehicles require larger amounts of seating and electrical content. This means that revenue per unit generated by Lear could increase through March on higher sales for its luxury carmaker customers.
Operating Margins To Improve This Quarter
Lear’s seating division saw a decline in operating margins last year, with the figure falling to 4.8% from 6% in the previous two years. This was mainly due to manufacturing and launch inefficiencies in the Americas. [4] However, in the first quarter, Lear expects margins for the seating division to improve, primarily due to the backlog coming in. Around 70% of the sales backlog is in seating, and is expected to boost divisional sales and consequently profitability. For the EPMS division, the company expects operating margins to grow from 9.8% in 2013 to 10.5%-11% this year, driven by a competitive low cost structure and steady increase in electrical content per vehicle.
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- “Lear’s 10-k“ [↩]
- “China sales rise 7.9% in March, GM tops VW in Q1“, April 2014, autonews.com [↩]
- “US monthly sales [↩]
- “Lear earnings transcript“ [↩]