Lear Pre-Earnings: Strong Automotive Demand In Key Markets To Fuel Top-Line Growth
Riding on a strong increase in global vehicle volumes, led by the U.S. and China, expect Lear Corporation (NYSE:LEA) to report robust sales growth in Q4 on January 30. Lear provides seating and electrical interiors to some of the largest automakers in the world, and therefore depends on the global automotive demand to propel business-growth. The last three months, especially December, saw a large number of vehicle sales in key markets, which should boost Lear’s full-year results. In particular, GM, Ford, and BMW, which together formed 54% of the net revenues for the company in 2013, along with the supplier’s other clients such as Volkswagen, witnessed strong growth in the U.S. and China, which should offset the decline in automotive demand in markets such as Russia and Brazil this quarter. Notably, growth in the luxury vehicle segment has outpaced growth in the automotive industry in many crucial markets. This is expected to boost Lear’s top line, as premium seating contributes higher revenue per unit and these vehicles also typically require more electrical content.
Lear’s stock has jumped 28% in the last 52 weeks, with the company reporting 10% revenue growth through Q3, outpacing the 4% rise in global vehicle production during this period. Lear has not only been able to increase penetration in high growth markets such as China, where automotive production rose by 7.2% last year, but has also looked to supply more to its luxury automaker clients, bolstering growth in the company’s average content per vehicle, and subsequently revenues. [1] We expect high premium vehicle sales in Q4 to have boosted Lear’s content per vehicle, as well as the bottom line, as premium seating typically carries fatter margins. With more than 100 manufacturing and engineering facilities (out of 203 in total) located in low-cost countries, and a surge in automotive production, Lear’s seating and electrical divisions could end 2014 with 6% and 12% operating margins respectively. 2014 will be another year where the electrical division witnesses strong margin growth; operating margins for this division rose from 7.2% in 2012 to 9.8% in 2013.
We estimate a $100 price for Lear Corporation, which is roughly 2% above the current market price.
See our full analysis for Lear Corporation
High Automotive Demand In The U.S. To Fuel Growth
The U.S. automotive market crossed 16.5 million in volume sales last year, up 6% from 2013 levels, and on account of lower energy prices and increasing disposable incomes, automotive demand is expected to remain strong in 2015. [2] North America formed 38% of Lear’s net revenues last quarter, and the performance of its clients in this region will play a major role in molding the overall results for the seating and electrical supplier this quarter. GM and Ford formed a third of overall unit sales in the U.S. light-duty vehicle market in 2014, with the former’s North America sales rising 5.5% year-over-year last year. [3] As the country witnessed its highest vehicle demand since 2006, this should have translated into more business for Lear, boosting its Q4 and year-end results. Revenue growth in North America is also expected to be supported by high sales of luxury vehicles. In particular, BMW, the third largest client for Lear, overtook Mercedes to become the highest-selling premium carmaker in the country, selling 9.8% more vehicle units as compared to the previous year.
Seating Sales To Rise On Higher Proportion Of Premium Offerings
Premium autos require higher seating and electrical content, and as demand for these high-end vehicles remains robust, Lear has also looked to strengthen its luxury offerings to achieve higher sales per unit vehicle. Apart from the U.S. and China, supporting our estimate for high premium sales this quarter is a rise in vehicle volume sales in Europe. Following the double-dip recession, automotive production in Europe returned to positive growth last year. Although the recovery has been patchy and slower than expected, vehicle volumes in the region rose 5% last year to over 13 million units, with more than a little help from falling fuel prices, tax breaks, and incentives. [4] Each of the leading German luxury automakers BMW, Audi, and Mercedes-Benz has achieved growth in Europe through the last year, growing sales by 5%, 5%, and 6% respectively. Apart from strengthening domestic sales, high export demand for luxury vehicles such as the Audi A4 and A6 and BMW 3-series is also expected to augment European sales for Lear, which generates around 40% of its net revenues from Europe and Africa. Luxury vehicles require higher seating content and a relatively more complex electrical structure, which is why higher proportionate sales of these vehicles expanded Europe and Africa unit’s content per vehicle by 9.5% in Q3, and could do the same again this quarter.
Going forward, Lear will look to further penetrate the luxury interiors space to boost its average content per vehicle. One step in this direction is the acquisition of Eagle Ottawa, the world’s largest supplier of premium automotive leather. The deal, expected to close in Q1 this year, will cost Lear around $850 million. Eagle Ottawa generates around $1 billion in revenue, and is the leather supplier for over 50% of all cars in the U.S., including many for GM and Ford. Lear has come a long way since filing for bankruptcy in 2009, in the thick of the recession. Net sales for the automotive interiors supplier rose 67% between 2009-2013, and with key European markets returning to growth last year, net revenues in 2014 could have risen by another 8.5-10%. Flush with cash, Lear is now looking to acquire companies that could strengthen its portfolio, and help the company compete better with other automotive suppliers.
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