Lear’s Content Per Vehicle To Rise On Higher Premium Seating Sales
Lear Corporation (NYSE:LEA) is a leading supplier of seating and electrical interiors to automakers around the world, including luxury vehicle manufacturers such as BMW, Volkswagen’s Audi, Daimler’s Mercedes-Benz, Chrysler, and Jaguar Land Rover. In fact, BMW is the third largest client for Lear, contributing 10% to the latter’s top line last year. Lear’s sales have risen by an impressive 10% in the first nine months of this year, outpacing the 4% growth in global vehicle production during this period. This disparity is because of a simultaneous increase in content per vehicle — both seating and electrical, for Lear. While demand for a more complex electrical architecture and higher seating content has increased in entry-level vehicles, higher proportionate sales of luxury vehicles is also instrumental in boosting Lear’s revenues per vehicle. Premium autos require higher seating and electrical content, and as demand for these high-end vehicles remains robust, Lear has also looked to strengthen its luxury offerings to achieve higher sales per unit vehicle.
One step in this direction is the acquisition of Eagle Ottawa, the world’s largest supplier of premium automotive leather. The deal, expected to close in Q1 next year, will cost Lear around $850 million. The automotive interiors supplier has come a long way since filing for bankruptcy in 2009, in the thick of the recession. Net sales for the company rose 67% between 2009-2013, and with key European markets returning to growth this year, net revenues could rise by another 8.5-10% this year. Flush with cash, Lear is now looking to acquire companies that could strengthen its portfolio, and help the company compete better with other automotive suppliers.
We estimate a $100 price for Lear Corporation, which is roughly 4% above the current market price.
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Eagle Ottawa generates around $1 billion in revenue, and is the leather supplier for over 50% of all cars in the U.S., including many for GM and Ford, which together constituted 44% of Lear’s 2013 sales. 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, especially in Europe.
Eagle Ottawa Strengthens Lear’s Premium Seating Offerings
Following the double-dip recession, automotive production in Europe has returned to positive growth this year. Although the recovery has been patchy and slower than expected, vehicle volumes in Western Europe are expected to rise 5% this year to over 12.1 million units. Each of the leading German luxury automakers BMW, Audi, and Mercedes-Benz has achieved growth in Europe through the first eleven months of this year. Apart from strengthening domestic sales, high export demand for luxury vehicles such as the Audi A4 and A6 and BMW 3-series is also expected to augment European sales for Lear, which generates around 40% of its net revenues from Europe and Africa. Luxury vehicles require higher seating content and a relatively more complex electrical structure, which is why higher proportionate sales of these vehicles expanded Europe and Africa unit’s content per vehicle by 9.5% in Q3.
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Here’s where Eagle Ottawa comes in. The company generates approximately 17% of its revenue from Europe, where Lear is already the exclusive seating provider for some of the compact models made by BMW, Audi, and Mercedes. Inclusion of Eagle Ottawa will make Lear more competitive in the premium seating space in Europe, which is important as the demand for luxury vehicles and higher seating content per vehicle in the region is rising.
Apart from a rise in content per vehicle, higher proportionate sales of luxury vehicles will also boost Lear’s margins. Luxury seating content tends to carry fatter margins, and with the inclusion of Eagle Ottawa, the proportion of premium seating sales is expected to rise for Lear. Eagle Ottawa presently operates at margins above the targeted near-term operating margins for Lear’s seating division, which is why the latter’s profitability could further improve going forward. In addition, Lear has already identified $20 million in cost savings from synergies, which it aims to achieve in around two years after the closing of the deal, further boosting profits. [1] Lear’s seating division margins declined last year mainly due to manufacturing and launch inefficiencies in the Americas, but have rebounded this year, and are expected to reach almost 6% for the full year.
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