Lear Corporation Ends 2015 With Solid Operational Performance

As expected, Lear Corporation (NYSE:LEA) delivered solid results in Q4, announced on January 28, capping off a solid 2015 for the automotive seating and electrical interiors supplier. Adjusted earnings per share rose by 41% year-over-year to $3.20 per share, beating consensus estimates for the fifth consecutive quarter. ^[1] Full-year sales rose 3% to $18.2 billion — in line with Lear’s guidance, and more than the 2% rise in global automotive production. In fact, in organic terms, Lear’s revenue rose 11%, reflecting how the core business continued to perform strongly.

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

See our full analysis for Lear Corporation

Lear’s business depends on the demand from its automaker clients, which subsequently depends on the worldwide vehicle demand. And as global vehicle production grew by a strong 4% in the last quarter, the company benefited from this rise in demand. In particular, production rose by 14% in China in Q4 alone, and by 4% in Europe and Africa. The strong growth in North America and Europe, and the comeback of the Chinese vehicle market in the last quarter, bode well for Lear. Let’s look at the company’s performance in these crucial markets:

• Production in North America rose by 3% in 2015, and Lear’s sales in this region, which represents 43% of its net sales, increased 15%. Lear’s growth in North America is buoyed by the increase in volume sales for its clients, as well as positive mix. Both GM and Ford, the largest automakers in the country with a combined share of 32.5%, and Lear’s largest clients, registered 5% and 5.3% respective volume growth in the country last year. On the other hand, Lear gained from the higher demand for SUVs and pickups, which tend to use more electrical and seating content. 2015 was the year of the SUVs/Crossovers, which grew 16.3% to over 35% of the net volume sales in the U.S.  Lear’s business is well-balanced in the region, with a well-spread presence in the luxury, non-luxury, and light-truck segments. The company has about one-third of the pickup truck market in North America, and is the leader in performance and luxury seating, which means that the uptake in volume in these two segments (luxury and non-truck), which use more content per vehicle, boosted Lear’s top line. Lear’s content per vehicle rose 11% to $443 in North America last year.

Source: motorintelligence.com

• Passenger vehicle sales in Europe rose for the second consecutive year in 2015, and that, too, by 9.3%. ^[2] The economic conditions in the region have improved over the past year, following the double-dip recession and Greece crisis, with the Southern countries recording impressive growth in vehicle sales. Although Lear’s sales in Europe and Africa were down 3.5% year-over-year for the full year, the rate of decline fell in Q4, signaling signs of improvement. In addition, demand for luxury vehicles remains strong in the region, which bodes well for Lear, which supplies luxury and performance seating to BMW 3 series, Jaguar Land Rover, Mercedes C-Class, Audi’s various platforms, and even to super-luxury brands Maserati and Ferrari.

• China’s passenger vehicle market picked up pace through the latter half of last 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. ^[3] Lear has a major presence in China with complete engineering capabilities and 44 manufacturing facilities. In 2015, Lear had $2.3 billion in sales at its non-consolidated joint ventures, a vast majority of which are located in China. This figure is double the company’s sales of $1.2 billion in 2010. The company’s equity earnings from these joint ventures also doubled to $50 million from $24 million in 2010. Lear now expects these joint ventures to continue to grow strong and surpass $3 billion in sales by 2018, based on its 3-year non-consolidated sales backlog of $700 million. ^[4]

What works for Lear is that its business is well-balanced, in terms of product segment, customer and platform mix, and by geography. So basically, when one market isn’t doing well, growth in another market offsets that. For example, in China, 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.

Apart from the spike in vehicle demand during the last quarter, benefiting Lear, a strong operational performance helped the company cap off a solid year. Lear’s stock performance has outpaced that of its competitors, as seen from the chart.

Lear has generated approximately $3 billion in cash flow since the start of 2010. Its free cash flow yield of 11% is among the highest in the automotive sector and more than that of its direct competitors. Adjusted seating margins for the year grew 140 basis point from 2014 levels to 7.1% for the full year, and that of the electrical segment rose 100 basis points to 13.8%. About a third of the rise in seating margin was from Eagle Ottawa, the leading supplier of premium automotive leather, and the synergies from the consolidation of this business.

Despite the negative currency impact, Lear has managed to consistently outpace growth in global automotive production levels. 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.

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. Lear 8-k [↩]
2. Passenger car sales data-Europe, acea.be [↩]
3. passenger vehicle stats, caam.org [↩]
4. Lear earnings transcript [↩]