Is The Lear Corporation Stock Undervalued?
Lear Corporation (NYSE:LEA) is the leading global supplier of automotive seating and electrical systems to automakers around the world. The company has consistently grown by more than the growth in global vehicle production, on the back of its diversified portfolio and rising content per vehicle. 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 expanded at a CAGR of 8.8% between 2010-2015, faster than the nominal 4% growth in the global vehicle production during this period. Flush with cash, Lear has looked to acquire companies that could strengthen its portfolio, and help the company compete better with other automotive suppliers.
Lear’s stock performance has outpaced that of its competitors, with its shareholder return between 2012-2016 comprehensively beating that of its competitors, as shown in the chart below. Lear has beaten the 100% shareholder return of its peer group and 98% shareholder return of the S&P 500 during this period.
Source: Lear Corporation Presentation
Lear’s 2012-2016 EV/EBITDA ratio stands at 4.8x according to the company, against the peer group average of 5.8x. This presents a case for Lear Corporation being undervalued, especially as the company is primed for strong growth going forward. The company’s business is well-balanced in terms of product segment, customer and platform mix, and by geography, i.e. if the market is down in one location, the company could extract growth in some other market. In addition, the advantage that Lear has over individual automakers is that it caters to a number of clients. Ford, GM, and BMW together formed 53% of the company’s net sales last year. 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.
In terms of top line growth, Lear’s seating division, which forms roughly 69% of the company’s valuation as per our estimates, has seen revenue grow at a CAGR of 5.8% between 2011 and 2016 (estimated). This has been fueled by strategic acquisitions such as that of Eagle Ottawa at the beginning of 2015, which made Lear more competitive in the premium seating space. Eagle Ottawa is the world’s largest supplier of premium automotive leather, and this acquisition has led to an increase in Lear’s market share to 30% in leather seat covers, a segment of the seat assembly market valued at $3.8 billion currently. On the other hand, Lear’s electrical business has also seen the inclusion of businesses such as automotive connectivity supplier Arada Systems and internet-based telematics and app service provider Autonet Mobile in 2015, driving growth opportunities for the future in the growing market for connected cars.
While Lear has consecutively reported solid growth in top line due to its diversified business and strategic inclusion of businesses, its consistently improving operational performance has led to an upward revision in full-year earnings and cash flow guidance after the announcement of the Q3 results. Core operating earnings are expected to range between $1.5-$1.525 billion in 2016, up from the prior range of $1.45-$1.50 billion. 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 100 of Lear’s manufacturing engineering facilities, out of a cumulative 240 facilities, are located in low-cost countries.
For 2017, Lear expects to increase its revenue from an estimated $18.6 billion in 2016 to $19.5 billion, on the back of a $1.3 billion sales backlog and $0.5 billion impact of positive mix.
Have more questions on Lear Corporation? See the links below.
- How Lear’s Seating Division Is Geared For Growth Through The End Of The Decade
- Why Lear Has Been Growing By More Than The Global Vehicle Production Growth
- Downside To Lear’s Valuation If Global Automotive Growth Slows Down
- How China Is A Major Boost For Lear Corporation Right Now
- Lear Raises Guidance On Solid Operational Performance
- What Will Be The Jump In Lear’s Valuation If Electrical Margin Jumps By More Than Expected?
- What Will Be The Jump In Lear’s Valuation If Seating Margin Expands By More Than Expected?
- Growing Content In China Could Add To Lear’s Growth This Year
- Lear Earnings Review: Profit Rises On Solid Performance Across Seating And Electrical Segments
- What’s Lear Corporation’s Fundamental Value Based On Expected 2015 Results?
- Where Will Lear’s Revenue And EBITDA Growth Come From Over The Next Three Years?
- What Is Lear Corporation’s Revenue And EBITDA Breakdown?
- By What Percentage Have Lear’s Revenues And EBITDA Grown Over The Last Five Years?
- How Has Lear Corporation’s Revenue And EBITDA Composition Changed Over 2011-2015?
- What Is Lear Corporation’s Geographical And Client-Wise Revenue Breakdown?
- Why Lear’s Stock Has Appreciated 90% In The Last Five Years
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