Key Takeaways From Lear’s Third Quarter Results
Lear Corporation (NYSE: LEA) reported its third-quarter results on October 25th, 2018 and conducted a call with analysts the same day. The company posted an adjusted EPS of $4.09, up 3% from a year ago and revenue of $4.9 billion compared to $5.0 billion in the third quarter of 2017. The 2% decrease in sales was attributed to the challenging macro-economic conditions, particularly in China and Europe as well as to foreign exchange volatility. The company experienced lower margins due to program changeovers and rising commodity costs which have weighed on the company’s overall performance in this quarter.
We have a price estimate of $172 price estimate for the company, which is above than the current market price. Our detailed revenue estimates for the company have been attached to our interactive dashboard – Our Outlook For Lear Corporation in 2018. You can modify the assumptions to arrive at your own price estimate for the company.
Key Highlights From Q3
In the third quarter, the company experienced sales of $4.9 billion, down 2% y-o-y. The lower sales were mainly due to lower production on key Lear platforms, primarily in China and Europe. The company experienced a sales growth of 9% in the e-systems segment due to a strong backlog, particularly in China. Adjusted earnings were, however, significantly lower for e-systems, down 230 basis points, due to incremental China wire harness business and increased investment to support the backlog and further growth.
Consequently, seating sales were down by around 5% y-o-y, where a strong backlog in China was further mitigated by the roll-off of BMW X5 and Ford Focus in North America. Adjusted earnings and margins for this segment were higher by 50 bps as compared to the year-ago quarter, due to the launch of profitable backlog programs, a benefit of the roll-off of the lower margins program in North America and strong operational performance
The automotive sector has been under pressure for the past few months due to uncertainty around the trade war and tariffs on the automotive sector, rising interest rates, the North-American auto cycle, foreign exchange risk, and declining production volumes in China and Europe. Though the sector is facing softer volumes in Europe, Lear hopes to move over the WLTP (Worldwide Harmonized Light Vehicle Test Procedure) related delays by early 2019. Moreover, a new negotiated NAFTA deal is likely to have minimal impact on the tariffs experienced by the company. Lear has a good line-up of the product launches in the next 3-4 quarters.
FY’18 Expectations
Given the gloomy environment for the segment, Lear has downward revised its outlook for FY’18. The company now expects total sales of $21-$21.2 billion in FY’18 as opposed to its previous expectations of $22 billion. The lower sales outlook is mainly due to lower demand in China and Europe. Further, the current outlook for profitability has been reduced by 60 basis points as compared to the previous outlook.
Apart from this, free cash flow expectations have been lowered by $200 million from the prior outlook of $1.2 billion. Free cash flow’s outlook for FY’18 is now 16.7% lower than the previous outlook and around 16% lower than the last year figures, largely due to lower anticipated earnings, slightly higher capital expenditure, increased working capital, foreign exchange environment and higher restructuring costs.
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