Lear Corporation Pre-Earnings: Strong U.S. And China Sales To Boost The Top Line In Q3

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LEA: Lear logo
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Lear

The automotive interiors supplier Lear Corporation (NYSE:LEA) is scheduled to announce its third quarter results on October 24. With increases in global vehicle production levels this quarter, fueled by growth in North America and China, sales for automakers and in turn for automotive interior manufacturers should also rise. Lear’s top line has expanded by nearly 11% in the first half of the year mainly on the back of higher vehicle demand as well as more interior content per vehicle. We expect another quarter of strong revenue growth for the company on the back of higher global vehicle production, which could slightly be offset by lower volumes in Europe and South America, given the tough economic conditions. However, despite lower overall vehicle volume sales in Europe and South America, premium vehicle volumes have remained strong in both the continents. This means that even though Lear could have supplied seating and electrical interiors to a lesser number of vehicles in Europe and South America this quarter, higher average content per vehicle due to higher proportionate sales of luxury and electrical vehicles could boost the net revenues.

Lear has also aimed to increase its productivity in both the seating and electrical divisions by removing bottlenecks in the operations in the Americas and by leveraging a low-cost structure. Seating division margins could rise to 5.5-6% again for the full year, after falling 120 basis points to 4.8% in 2013, while margins for the electrical division are expected to range between 11.5-12% this year, twice the 2011 levels.

We estimate a $98.92 price for Lear Corporation, which is roughly 19% above the current market price.

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See our full analysis for Lear Corporation

Automotive stocks have in general taken a hit in recent times. The overall S&P Index has declined in the last three months, but the stocks of GM and Ford, the largest clients of Lear that formed 44% of the net sales last year, have fared even worse. Lear’s stock has performed slightly better than the stocks of automakers in the last three months, but still lags the growth in broader indices. The company’s stock has plunged by nearly 20% since reaching a high of $103.74 on September 8. However, we value Lear’s stock higher than the current market price due to anticipated strong worldwide vehicle demand, increasing content per vehicle and expanding margins, as the company looks to increase cost-effectiveness.

U.S. And China Sales Remain Strong, Could Boost Lear’s Top Line

North America sales formed 37% of the net sales for Lear through the first half of the year, and continual strong vehicle production levels in the region could boost the company’s top line in Q3 as well. Light vehicle production in North America rose almost 8% in the third quarter, after rising 4% in the first half of the year. This increase in vehicle demand also led to an 8% year-over-year increase in GM’s retail sales in the quarter in the U.S., while the company’s global volumes grew 2% during this period. [1] Lear should also benefit from higher sales for GM, as well as for its other automaker clients such as BMW, Daimler, Volkswagen, Fiat, Hyundai, Jaguar Land Rover, Peugeot and the Renault-Nissan Alliance, in North America.

On the other hand, although the rise in vehicle production in China is estimated at 9% this year, down from double-digit growth percentages in the last couple of years, the country’s automotive market is still the fastest growing in the world. GM’s retail sales in China increased by 12% in Q3, reflecting continual strong vehicle demand in the country where disposable incomes continue to rise. On the other hand, although Ford sells considerably lower volumes compared to its compatriot GM in China, the former’s sales are up 30% so far in the year, outpacing the growth in the country’s overall automotive market. This bodes well for Lear as high vehicle demand means inflow of additional business for the company. Bolstered by high vehicle production volumes in the U.S. and China, Lear’s revenues could rise by 8.5-10% this year, as estimated by the company.

Higher Content Per Vehicle Owing To Strong Electric And Luxury Vehicle Demand

Why we expect Lear’s revenues to rise by a high single-digit percentage this quarter, more than the expected rise in global vehicle production volumes, is because of an estimated simultaneous increase in revenues per vehicle. This is because of increased sales of electrically-controlled and luxury vehicles. Electric and hybrid electric vehicles almost double the electrical content requirement of a car. On the other hand, premium vehicles require more electrical content, as well as higher seating content per unit. Demand for these vehicles has remained high, and this should boost Lear’s content per vehicle and consequently the net revenues in Q3.

Lear supplies electrical content for the Chevy Volt and Cadillac ELR, manufactured by GM, the company’s largest client. Cadillac ELR began selling in December in the U.S. and has sold almost 900 units since. [2] Electric vehicle sales in the U.S. have increased 25% year-over-year through September, and could continue to rise as consumers switch to economically and environmentally viable vehicles with improvement in battery charging infrastructure in the country.

Lear supplies seating and electrical interiors to premium automakers such as BMW, which constituted around 10% of the net sales in 2013, and also to companies such as Volkswagen’s Audi, Daimler’s Mercedes-Benz, Chrysler and Jaguar Land Rover. In fact, Lear is the exclusive seating provider for some of the compact models made by the German automakers BMW, Audi and Mercedes in Europe. Although overall automotive volumes have still not picked up in the European Union following the double-dip recession, luxury vehicle volumes have grown in the region. BMW reported a strong 7% rise in vehicle volumes in Europe last month. This means that even though overall vehicle production volumes could drop in Europe this quarter, continual growth in premium vehicle sales should benefit Lear’s business. Europe and Africa form the largest sales-base for Lear, contributing almost 40% to the net sales in the first half of the year.

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Notes:
  1. GM press release []
  2. U.S. EV sales, insideevs.com []