Morningstar | LEA Updated Star Rating from 07 Jan 2019
Narrow-moat-rated Lear, vendor of seats and electrical architectures to the global automotive industry, reported earnings per share before special items, or EPS, of $4.09, $0.08 ahead of the sell-side consensus EPS of $4.01 but $0.13 better than the $3.96 EPS reported in the same period last year. Revenue of $4.9 billion was 1.8% lower compared with the third quarter of 2017 but would have been flat excluding the negative impact of currency. Seating revenue declined 4.8% while electronic and electrical revenue was up 8.6%. Weaker seating sales were attributable to lower volumes in Europe and South America.Management lowered 2018 guidance, including a revenue forecast range of $21.0-21.2 billion and adjusted operating income in a range of $1.73-1.75 billion. While revenue guidance is down $800 million, adjusted operating income guidance was only lowered $60 million versus management's prior expectations. We were impressed that management was able to maintain margin given the degree of revenue decline.
We reduced our 2018 revenue and adjusted operating income estimates to $21.1 billion and $1.75 billion, respectively, which had little impact our $112 fair value estimate. Currently trading at a 15% premium over our $112 fair value estimate, we view the 3-star-rated stock as being reasonably valued relative to our expectations for revenue growth, future cash flows, and returns on invested capital.
However, the market has become enamored with several stocks in the auto supplier group that possess technologies that enable participation in the growth of automotive electronics and electrical systems, including Lear. These stocks have been trading as though revenue growth and margin expansion continue in perpetuity. For our DCF model’s fair value to reach the sell-side’s $178 consensus price target, one would have to believe that Lear could generate a normalized, sustainable, midcycle EBITDA margin of 11.8%. Compare this to the 2017 EBITDA margin of 10.7% (a 10-year high), our midcycle assumption of 8.6%, and the 10-year historical median of 7.5% and one can begin to see how the sell-side consensus price target may be valuing Lear stock as though economic cycles are extinct.
Lear is a supplier to the automotive industry. The company supplies seating, electrical distribution systems and electronic modules, as well as related sub-systems, components and software, to automotive manufacturers. The company has two segments: Seating, which consists of the design, development, engineering, just-in-time assembly and delivery of seat systems, and the design, development, engineering and manufacture of seat components; and E-Systems, which consists of the design, development, engineering and manufacture of electrical distribution systems, and electronic control modules, electrification products, connectivity products and software solutions for the cloud, vehicles and mobile devices.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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