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S&P Capital IQ


04/25/16 10:00:10 AM



This week's Focus Stock of the Week is Lear Corp. (LEA: $113) which carries S&P Global Market Intelligence's highest investment recommendation of 5-Stars, or Strong Buy. Lear is a leading U.S. supplier of automotive seating and electric and power management systems for global vehicle manufacturers. We expect that the company will generate about $18.9 billion in revenues in 2016 and $19.5 billion in 2017. Our recommendation is based on our expectations that Lear will benefit from rising global vehicle production. We believe Lear is positioned well to gain market share and benefit from seating and electronic parts demand growth.

Southfield, MI-based Lear is among the world's largest suppliers of automotive and components to global vehicle manufacturers. The company is primarily a Tier-1 supplier, working directly with automobile manufacturers.

The company has two operating segments: seating and electrical power management systems (EPMS). The seating segment includes seat system and related components, such as seat frames, recline mechanisms, seat tracks, seat trim covers, headrests and seat foam. The EPMS segment includes electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. It also has capabilities in wireless communication modules that process various signals to, from and within the vehicle, including cellular, WiFi and GPS, something we see as important in an increasingly connected automobile.

Revenues should benefit from rising backlogs. We look for LEA revenues to advance 4.0% in 2016, restrained by unfavorable currency rates. Electronic power management systems should see wider margins through 2016, as the segment benefits from restructuring actions and enhanced focus. With rising efficiency seating, margins should expand too. We expect greater profit contributions from joint ventures.

S&P Global Market Intelligence Equity Research U.S. new light vehicle sales rising 1.0% to a cyclical peak of 17.6 million in 2016, before softening in 2017. In addition, we expect sales growth in most regions. Rising prosperity in emerging markets, led by China, should drive global demand growth, despite slowed regional economic growth, and still depressed but rising European demand. Russia and South America, however, should see challenges. We think rising volume in the U.S. and abroad versus will help corporate profits and cash flows. Positive factors we see in the U.S. include employment growth, pent-up consumer and business demand and readily available access to credit for consumers. Low gasoline prices and increased housing and contractor activity are helping truck and utility vehicle sales. The average vehicle age is now about 11.5 years, an industry record, suggesting increased potential replacement demand.

Meanwhile, J.D. Power & Co. (which, like S&P, is owned by McGraw Hill Financial), projects global new light vehicle sales volume will increase 3.0% in 2016 to 91.9 million units, before slowing to 2.0% gains to 93.8 million in 2017.

Our forecasts assume the euro stays at recent levels. We estimate EPS of $12.15 in 2016 and $13.30 in 2017, supported by increasing demand, rising backlogs and executed and expected stock repurchases.

Lear's three largest customers, Ford, General Motors, and BMW, accounted for about 53% of 2015 revenues.

Sales in North America accounted for 43% of 2015 revenues, with Europe and Africa providing about 37%, Asia 18%, and South America less than 3%.

We believe, the company's strong balance sheet supports shareholder friendly actions. Lear is using its cash on hand to focus on material share repurchase transactions, as well as modest, strategic, non-transformational acquisitions to enhance its growth. The company's 2009 bankruptcy reorganization left it in an improved financial position, in our view. We expect continued return of capital to shareholders, including a dividend increase. We see Lear benefiting from global automotive demand growth, especially improvement in Europe.

We apply a multiple of 11X to our 2016 EPS estimate of $12.15 (also approximating 10X 2017's projection), based on peer and historical P/E multiples, resulting in our 12-month target price of $135. This is in line with its three-year average forward PE, and retains a discount to the declining peer average as the global economic cycle matures. Lear is growing faster than the industry.

Risks to our recommendation and target price include lower-than-expected demand for vehicles and Lear parts due to cyclical economic fluctuations and economic challenges in Europe. Unfavorable exchange rate fluctuations could also hurt sales and profits. A decline in the discount rate could cause pension expense to be higher than we project.

S&P Global Market Intelligence's views on stocks are constantly re-evaluated. Please refer to our most recent publication on this stock to see our current view.


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