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Analyzing Lear’s New Agreement to Support Growth in China

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Price movement

Lear (LEA) has a market cap of $8.5 billion. It rose by 0.92% and closed at $115.80 per share on August 23, 2016. The stock’s weekly, monthly, and YTD (year-to-date) price movements were 2.7%, 2.0%, and -5.2%, respectively, on the same day. Lear is trading 2.1% above its 20-day moving average, 4.4% above its 50-day moving average, and 3.3% above its 200-day moving average.

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Related ETF and peers

The iShares Edge MSCI USA Value Factor ETF (VLUE) invests 0.25% of its holdings in Lear. VLUE tracks an index of large and mid-cap US equities. Stocks are selected and weighted using fundamental metrics (earnings, revenue, book value, and cash earnings) aiming for exposure to undervalued stocks in each sector. VLUE’s YTD price movement was 5.0% on August 23.

The market caps of Lear’s peers are as follows:

  • Johnson Controls (JCI) – $28.7 billion
  • Delphi Automotive (DLPH) – $18.5 billion
  • Magna International (MGA) – $15.7 billion

Latest news 

Lear entered into an investment agreement with the Administrative Commission of Yangzhou Economic & Technological Development Zone to construct a state-of-the-art premium leather processing plant. It consists of a 32,000 square meter facility on 56,700 square meters of land in Yangzhou, China. The plant will support its sales growth and new business development in China.

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Performance in fiscal 2Q16

Lear reported fiscal 2Q16 net sales of $4.7 billion—a rise of 2.2% compared to net sales of $4.6 billion in fiscal 2Q15. Sales from North America and Asia fell by 2.9% and 6.7%, respectively. Sales from Europe and Africa as well as South America rose by 11.3% and 4.5%, respectively, in fiscal 2Q16—compared to fiscal 2Q15. The company’s cost of sales as a percentage of net sales fell by 2.1% in fiscal 2Q16—compared to the same period last year.

Its net income and EPS (earnings per share) rose to $282.4 million and $3.82, respectively, in fiscal 2Q16—compared to $181.9 million and $2.33, respectively, in fiscal 2Q15. It reported adjusted EPS of $3.66 in fiscal 2Q16—a rise of 29.8% compared to fiscal 2Q15.

Lear’s cash and cash equivalents and inventories rose by 16.6% and 6.7%, respectively, in fiscal 2Q16—compared to fiscal 4Q15. Its current ratio and long-term debt-to-equity ratio fell to 1.3x and 0.81x, respectively, in fiscal 3Q16—compared to 1.4x and 0.84x, respectively, in fiscal 4Q15. It reported free cash flow of $435.4 million in fiscal 2Q16—a rise of 20.8% compared to fiscal 2Q15.

During fiscal 2Q16, the company repurchased ~2.3 million shares of its common stock worth of $250 million. At the end of fiscal 2Q16, it retained $595 million under its share repurchase program.

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Quarterly dividend

Lear declared a quarterly cash dividend of $0.30 per share on its common stock. The dividend will be paid on September 22, 2016, to shareholders of record at the close of business on September 1, 2016.

Projections

Lear made the following projections for fiscal 2016:

  • sales of $18.5 billion–$18.8 billion
  • core operating earnings of $1.45 billion–$1.50 billion
  • free cash flow of ~$900 million
  • effective tax rate of ~28%
  • adjusted net income of $935 million–$975 million
  • pretax operational restructuring costs of ~$70 million
  • capital spending of ~$525 million

These projections are based on the following assumptions of industry vehicle production:

  • 18.0 million units in North America
  • 22.3 million units in Europe and Africa
  • 24.0 million units in China

In the next part, we’ll take a look at Delphi Automotive.

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