What Is The Importance Of Asia To Lear’s Valuation And Growth?

-10.27%
Downside
145
Market
130
Trefis
LEA: Lear logo
LEA
Lear

Lear Corporation (NYSE: LEA) reported its Fiscal Year 2018 results recently and conducted a call with analysts on the same day.  Lear missed the consensus estimates for earnings and revenue for the Fiscal Year 2018. The company reported $21.15 billion in revenue, up by 3% year on year (YOY). This was driven by a strong backlog, favorable foreign exchange, sales resulting from gaining control affiliates and the acquisition of Grupo Antolin’s seating business, and partially offset by the impact of lower production volumes on key platforms in major markets. The company’s core operating earnings were up by $30 million to $1.75 billion, with a margin of 8.3%. E-Systems margin of 11.3% was down 300 basis points from 2017 while seating systems margins were flat at around 8%.

We have a $178 price estimate for the company. In our interactive dashboard How Important Is Asia To Lear?, we provide two scenario’s in which we consider how the change in Revenue in Asia affects Lear’s share price. In addition, here is more Consumer Discretionary data.

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Lear has a stable presence in Asia, Revenue has been in the range of 18% to 19.4% of Total in the last 3 years. China is the highest contributing region here with nearly a 70% contribution in FY 2018. Currently in emerging markets China and India are leaders in light vehicle production. The company provides all vehicle segments of the automotive light vehicle original equipment market in every major automotive producing region in the world. So, too, a presence in the emerging markets, especially China and India, as consequently Asia is very important for the future growth of the company.

In this scenario we will ascertain the effect on Lear’s valuation if the revenues from Asia are 50% less and Nil so as to determine the importance of the segment to the share value of the company.

In case the revenues are lower by 50%, then the estimated share price would fall to $161, down by 9.76% from the current Trefis Price. In the second case, if there was no presence in Asia the estimated share price goes down to $143, down by 19.52% from the current Trefis Price.

Thus, we can say that Asia is a substantial part of Lear’s valuation and growth.

 

Note: In the scenario we haven’t assumed any closure costs as here we are seeing the situation as “what would it be if the company had no presence,” and not “what would it be if the company shut down the existing operations.”

 

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