Lear Earnings Preview: Top Line Growth To Outpace Vehicle Production, But Currency Could Play Spoil Sport
Lear Corporation (NYSE:LEA) is scheduled to announce its Q2 and full first half results on July 24, and we expect the company to post a strong set of results yet again, on growing vehicle volumes and interior content. [1] Lear supplies automotive seating and electrical interiors to automakers around the world, and thus the business of the company is impacted by the global demand for vehicles.
See our full analysis for Lear Corporation
As has happened in the previous quarters, we expect the company to grow by more than the growth in global automotive production. Net sales grew 4% to $4.5 billion in Q1, more than the 2% growth in vehicle production levels around the world. [2] This is primarily due to two reasons–Firstly, while global production numbers are dragged down by the downturn in Eastern Europe, South America, and even in China in recent times, Lear’s strong relationships with the most prominent automakers spread across the world should be the reason why the company’s business continues to thrive in Q2 as well. In other words, being a leader in automotive interiors, and having a strong brand recognition, we don’t expect Lear’s business to be hampered despite slightly tepid vehicle demand in some crucial markets. Secondly, the company is expected to expand its top line not only on the back of higher vehicle production levels, but also due to higher content per vehicle, due to segment shifts, i.e. to premium vehicles and/or SUVs/Crossovers that require higher interior content.
Rising Automotive Demand In Europe To Fuel Growth
Vehicle demand in Europe has continued to rise in Q2, with the largest year-over-year increase in passenger vehicle registrations achieved in June (14.6%). [3] European Union passenger vehicle registration, which has risen for 22 consecutive months now, is up 8.2% year-over-year through June. Apart from GM, Ford, and BMW, which together formed 54% of Lear’s sales in 2014, the company also supplies automotive interiors to Daimler AG, Fiat Chrysler Automobiles, Hyundai Motor Company, Jaguar Land Rover, Peugeot S.A., Renault-Nissan Alliance, and Volkswagen Group. Lear is expected to gain from the growth in vehicle demand, this quarter again, in Europe, which along with Africa, formed 38% of the net sales for the company in Q1.
Source: European Automobile Manufacturers Association
Apart from volume growth, what is expected to propel top line growth in Europe for Lear is the higher demand for premium vehicles. The company is the exclusive seating provider for some of the compact models made by the German automakers BMW, Audi, and Mercedes in Europe. BMW is, in fact, the largest luxury client for Lear, contributing 11% to the company’s sales in 2014. BMW Group and Daimler grew by 12% and 15% respectively through June, over a year ago period, in Europe–more than the growth in the overall auto market. This bodes well for Lear, as premium vehicles typically require more electrical and seating content, which could boost the company’s content per vehicle this quarter. However, the impact of this might slightly be offset by negative currency translations–the depreciating euro, Russian ruble, and other foreign currencies against the U.S. dollar. Currency fluctuations were almost an 8 percentage point headwind on the top line in Q1.
Lear Could Be Unaffected By The Lower China Volumes
Economic conditions have become weaker in China, over previously seen high GDP growth levels, due to industry overcapacity, and real estate and infrastructure sector slowdowns. This has caught up to the automotive industry in the country too, with the growth rate in production of passenger cars down 4.7 percentage points compared to the previous year through June (vehicle production is up 6.4% year-on-year). In fact, passenger vehicle registrations were down in June in China.
Despite this downturn, Lear might still be well placed in China, which contributed 12% of the company’s net sales in 2014. This is as the company has maintained strong relationships with foreign automakers in the country, as well as domestic automakers such as FAW, BAIC, Dongfeng, and SAIC. Sales growth for Chinese-branded passenger vehicles outpaced growth in the country’s overall automotive market through the first six months, reaching 4,184,600 units, up 14.6% year on year. The market share for domestic vehicles increased 3.5 percentage points compared to the previous year. [4] Local brands are outpacing growth in foreign joint ventures, but this isn’t a problem for Lear, as a considerable 40% of its seating business in China is with major domestic automakers. [5] In addition, local companies are also looking at suppliers such as Lear to further develop their brand, which should contribute to Lear’s future growth.
The content per vehicle will also be boosted by Eagle Ottawa for Lear this quarter. The acquisition of Eagle Ottawa, the world’s largest supplier of premium automotive leather, which generates around $1 billion in revenue, was completed at the start of the year. Eagle Ottawa aided in an impressive 16% rise in currency neutral seating sales in Q1, and is expected to benefit full year seating margins by 20 to 30 basis points, due to its higher price points and premium positioning. Inclusion of new business would not only boost Lear’s top line, but due to Eagle Ottawa’s expertise in premium leather, the company could also gain additional contracts from luxury automakers.
Growing global production levels, and segment shifts to premium vehicles, and larger SUVs and Crossovers, which require higher seating and electrical content, are expected to continue to propel earnings growth for Lear this quarter. However, negative currency translations could be a party spoiler. Remember, Eagle Ottawa and the other business acquisitions will be incremental to Lear’s revenues this quarter. These might slightly offset the impact of depreciating foreign currencies on the company’s financials, which derives ~60% of its sales from outside the U.S.
See the links below for more information and analysis:
- Large demand for SUVs bodes well for Lear’s seating business
- Lear’s strong growth momentum continues into Q1
- Trefis analysis: Lear Corporation Seating Revenues
- Trefis analysis: Lear Corporation EPMS Revenues
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