Lower Automotive Sales Growth Could Hurt Lear Corporation

-10.76%
Downside
146
Market
130
Trefis
LEA: Lear logo
LEA
Lear

Lear Corporation (NYSE:LEA), which supplies automotive seating and electrical interiors to some of the leading automakers in the world, is likely to feel the impact of a softer progression of the global economy. Lear’s business effectively depends on global demand for vehicles, and with slowing economic conditions in China — the world’s largest automotive market, continual emerging market volatility, and slower than expected growth in the U.S., growth in global automotive volumes is expected to slow down this year.

We estimate a $108 price for Lear Corporation, which is above the current market price.

See our full analysis for Lear Corporation

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Lear has consistently outpaced growth in the global vehicle production levels, but the growth rate for Lear has slowed down. Weaker global economic conditions and softer vehicle demand could reduce Lear’s future business volumes. In addition, what’s been the biggest downer for the company this year is the appreciation of the U.S. dollar against certain crucial currencies. Net sales were up only 1% year-over-year in Q2, with unfavorable foreign exchange dragging down the top line by 9 percentage points. With the devaluation of the Chinese Renminbi, Lear’s revenues from China are also set to take a hit.

Apart from unfavorable currency translations, Lear could be impacted by slowing vehicle sales around the world.

China, which contributed 12% to the company’s net sales in 2014, is going through a slowdown. Weaker economic conditions, affected by the fall in the stock market, industry overcapacity, and negative customer sentiment, have hurt automotive demand, so much so that passenger vehicle sales fell in each of the last two months in China on a year-over-year basis. July sales were down 6.6%.

The advantage that Lear has over individual automakers is that it caters to a number of clients. GM, Ford, and BMW together formed 54% of the company’s net sales last year. In addition, 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 the Volkswagen Group. And in China, a considerable 40% of its seating business is with major domestic automakers. So, one could think that even if one automaker, or if foreign automakers aren’t faring well in the country, Lear could make up sales from another automaker, due to the growth in business at some other automaker. And considering that Lear has a strong brand recognition and ranks among the top seating and electrical automotive interior businesses, its strong relationships with automakers could mean that despite a declining market size, it could achieve growth by growing market share. But if growth stagnates for most of the automakers, Lear will feel the heat, too.

The other downer for Lear could be the fall in average content per vehicle. Growing sales of premium and larger vehicles, which require more seating and electrical content, have been fueling growth in average content per vehicle in the past. However, with substantial erosion of disposable incomes in China, the precipitous fall in the stock market, and devaluation of the Renminbi, the increased price sensitivity of consumers has resulted in higher sales of budget vehicles. This segment shift could impact Lear, lowering the average content revenue per vehicle, which essentially means that even if vehicle volume sales maintain growth, lower average content per vehicle will dent Lear’s top line growth. The situation becomes worse when we take into consideration the expected fall in volume sales growth this year. Following a 3.6% year-over-year rise in 2014, global car sales growth is forecast to grow by a slower 2.5% this year.

There is much speculation about the contagion impact of China’s devaluation of the Renminbi and following interest rate cut on the rest of the world, including the U.S. With slower-than-expected growth in the U.S., inflation not high enough to justify an increase in interest rates, and the recent decline in the stock market, the Federal Reserve might now look to delay the anticipated increase in interest rates. Softer global economic conditions will also trigger a slowdown in automotive sales.

But, on the other hand, one might think that with oil prices remaining historically low, disposable incomes might get a boost. The job market continues to do well and the housing sector has also seen growth this year. So, could this downturn be just near term? That is one question that we will have to wait to find out the answer.

Automotive sales growth is expected to slow down this year, hurt by the slowdown in China, and some other crucial emerging markets such as Brazil and Russia. This is, in turn, expected to dent Lear’s business.

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