Another Consecutive Quarter Where Lear Beats Consensus Estimates?

Lear Corporation (NYSE:LEA) is scheduled to announce its Q4 and full year results on January 28, and we expect another quarter where the automotive interiors manufacturer outpaces global automotive production. Through the first three quarters, Lear’s net sales grew 2.3% year-over-year, more than the 1% rise in global vehicle production. As the company provides automotive seating and electrical interiors to automakers, its sales depend directly on the performance of its clients, which subsequently depends on the global demand for vehicles. Lear is expected to have benefited from the relatively higher demand for vehicles during the latter half of the year, especially in the U.S., Europe, and China.

We have a $122 price estimate for Lear Corporation, which is above the current market price.

See our full analysis for Lear Corporation

Apart from the spike in vehicle demand during the last quarter, a strong operational performance is expected to cap off a solid year for Lear. Zacks Investment Research forecasts the EPS for the quarter at $2.90, around 28% above the 2014 figure of $2.27. The company has surpassed consensus estimates in four previous quarters, and has outpaced growth in the overall S&P 500 Index in the last five years. The stock is down 17% since the start of this year, as are most of other automotive stocks. Stocks of GM and Ford — Lear’s largest clients that form over 40% of its net sales — are also down 12-13% year-to-date. Lear’s stock performance has outpaced that of its competitors, as seen from the chart. Another quarter of strong operating performance could help raise investor confidence.

Source: StockCharts.com

Lear’s core operating earnings rose over 27% to $320 million, and adjusted margins for the company rose to 7.4% in the last quarter, up from 5.9% a year ago. The company’s low-cost manufacturing footprint and increased operational efficiencies have helped in pushing up the margins. Lear, just like other companies in the auto sector, has looked to make the most of its operations in low-cost emerging countries, where vehicle demand is growing due to steadily increasing disposable incomes and low current penetration levels. Lear has looked to leverage the low costs of manufacturing in these countries to boost profitability. More than 50% of Lear’s manufacturing engineering facilities are located in low-cost countries, up from 38% in 2010, according to our estimates.

What bodes well for Lear is the comeback of the vehicle market in China during the last quarter, and strong overall growth in the U.S. and Europe throughout 2015.

• The U.S. light-duty vehicle market grew by 5.7% year-over-year in 2015 to 17.5 million units. There are two reasons why Lear could have benefited from this growth. Firstly, both GM and Ford, the largest automakers in the country with a combined share of 32.5%, registered 5% and 5.3% respective volume growths in the country last year. Growth for Lear’s clients will mean growth for the company. Secondly, 2015 was the year of the SUVs/Crossovers, which grew 16.3%, to over 35% of the net volume sales in the U.S. SUVs tend to use more seating and electrical content, and thus segment shifts to these larger, more spacious, vehicles is expected to have boosted Lear’s average revenue per vehicle.

Source: motorintelligence.com

• Passenger vehicle sales in Europe rose for the second consecutive year in 2015, and that, too, by 9.3%. ^[1] The economic conditions in the region have bettered over the past year, following the double-dip recession and Greece crisis, with the Southern countries recording impressive growth in vehicle sales. This is expected to boost Lear’s sales, considering that Europe and Africa are expected to form approximately 37% of their net sales.

• China’s passenger vehicle market picked up pace through the latter half of the year, posting a 7.3% year-over-year rise for the full year. Besides the large rise in the U.S., SUVs showed a massive 52.4% rise in China, as well, in 2015. ^[2] Lear has a major presence in China with complete engineering capabilities and 44 manufacturing facilities. The company’s sales there are roughly $3.7 billion, including both consolidated and not consolidated, of which around $2.1 billion is consolidated. ^[3] The stronger pace of growth in passenger vehicles in the last quarter is expected to have further boosted Lear’s China sales. In addition, the advantage that Lear has in China is a well diversified business. The company has maintained strong relationships with foreign automakers in the country, as well as domestic automakers such as FAW, BAIC, Dongfeng, and SAIC. Local brands are outpacing growth in foreign joint ventures, but this isn’t a problem for Lear, as a considerable 30% of its seating business in China is with major domestic automakers.

Subdued oil prices have encouraged segment shifts to SUVs/Crossovers and from non-luxury sedans to luxury vehicles. This is expected to further boost Lear’s Q4 and full year results, due to higher revenue per vehicle for the automotive interiors supplier. While the negative impact of currency translations continues to wipe out most of the growth for American multinationals, Lear’s solid core performance kept the overall top line growth positive in the first three quarters. More of the same is expected in Q4, with the added stimulus of stronger automotive growth in crucial markets during the last three months of 2015.

See the links below for more information and analysis:

• Despite currency headwinds, Lear’s operational performance remains solid in Q3
• Lear pre-earnings: North America and Europe to offset lower Asia and South America sales?
• 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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1. Passenger car sales data-Europe, acea.be [↩]
2. passenger vehicle stats, caam.org [↩]
3. Lear earnings call webcast [↩]