Lear Pre-Earnings: North America And Europe To Offset Lower Asia And South America Sales?
Will growth in Europe and North America be enough to counter de-growth in China and other emerging economies?
Lear Corporation (NYSE:LEA) has consistently outpaced the growth in global automotive production, buoyed by its strong market position, well-spread business, and an increasing average revenue per vehicle, on higher sales of premium and larger vehicles. Lear’s business of supplying automotive electrical and seating interiors depends directly on the global vehicle demand. Vehicle sales have progressed well in the developed markets of North America and Europe this year, but on the other hand, the largest automotive market in the world, China, has taken a hit this year. So what could be the impact of the altering dynamics in the global automotive market on Lear’s business? Let’s find out.
We estimate a $108 price for Lear Corporation, which is below the current market price.
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North America And Europe Geared For Growth
43% and 37% of Lear’s net sales in Q2 came from North America, and Europe and Africa, respectively. North America sales, in fact, rose 15% year-over-year. Amid concerns of softer global economic growth, the U.S. automotive market continues to record solid growth led by the sustained high demand for SUVs/Crossovers. The country’s light-duty vehicle market rose 5% year-over-year through September, but while car sales have declined by more than 2%, light-truck sales have risen 11.7%. [1] Not only in terms of high volume sales, what works in favor of Lear is that light trucks typically require more seating and electrical content per unit, which will boost the top line.
Source: European Automobile Manufacturers Association
On the other hand, vehicle demand in Europe has continued to rise in Q3, with the largest year-over-year increase in passenger vehicle registrations achieved in August (11.2%). [2] European Union passenger vehicle registration, which has risen for 25 consecutive months now, is up 8.8% year-over-year through September. Lear is expected to gain from the growth in vehicle demand, this quarter again, in Europe.
How Much Impact Will The China Slowdown Have?
Economic conditions have become weaker in China, over previously seen high GDP growth levels, due to the fall in the stock market, industry overcapacity, and real estate and infrastructure sector slowdowns. This has caught up to the automotive industry in the country, too, with automobile production falling 0.8% year-over-year through September. [3] Lower automotive demand has hurt automakers who previously depended on the growth potential of the Chinese market. As China comes to term with normalization, automakers and auto part suppliers are bearing the brunt of lower production levels.
However, 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 of the other automakers. 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.
Roughly 20% of Lear’s net sales are from Asia and South America, and with certain crucial emerging markets facing macroeconomic headwinds, the company’s results in these regions could be impacted negatively this quarter. Revenues rose only 1% in Q2 for Lear, with unfavorable foreign exchange dragging down the top line by 9 percentage points. More of the same could continue into the third quarter, with the U.S. dollar continually strengthening against foreign currencies. However, despite the negative currency impact, Lear still managed to outpace growth in global automotive production levels, which in fact remained flat last quarter. Also, Lear’s commitment to expanding its low-cost footprint, and increasing operational efficiencies, has shown how despite a small sales growth, the company’s net income growth remains solid, which means more cash for its shareholders. This could bode well for the company in Q3.
See the links below for more information and analysis:
- Lear’s Q2 results review: profits grow despite currency pressures
- 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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- U.S. vehicle sales data [↩]
- Vehicle sales in Europe [↩]
- China automobile statistics, caam.com [↩]