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Goldman Sachs Downgrades Lear to a ‘Sell’

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Price movement

Lear (LEA) has a market cap of $8.9 billion. It fell 2.2% to close at $121.79 per share on October 6, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were 2.5%, 4.2%, and -0.04%, respectively, on the same day.

LEA is trading 3.0% above its 20-day moving average, 5.2% above its 50-day moving average, and 9.7% 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. The ETF tracks an index of large- and mid-cap US equities. It selects and weights stocks using fundamental metrics, including earnings, revenue, book value, and cash earnings, and its aim is exposure to undervalued stocks in each sector. The YTD price movement of VLUE was 5.3% on October 6.

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

  • Johnson Controls (JCI) — $43.1 billion
  • Delphi Automotive (DLPH) — $19.4 billion
  • Magna International (MGA) — $16.2 billion

Lear’s rating

Goldman Sachs has downgraded Lear’s rating to a “sell” from a “neutral.” It’s also reduced the stock’s price target to $107.0 from $116.0 per share.

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Performance in 2Q16

Lear reported 2Q16 net sales of $4.7 billion, a rise of 2.2% from its net sales of $4.6 billion in 2Q15. Sales from North America and Asia fell 2.9% and 6.7%, respectively.

Lear’s sales from Europe and Africa rose 11.3%, and its sales from South America rose 4.5% between 2Q15 and 2Q16. The company’s cost of sales as a percentage of net sales fell 2.1%.

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

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

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

Projections

Lear has made the following projections for 2016:

  • sales of $18.5 billion–$18.8 billion
  • core operating earnings of $1.45 billion–$1.5 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 article, we’ll take a look at Sealed Air (SEE).

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