Lear Corporation (NYSE: LEA)

Analysts: Prateek Baveja, Yifan Liu, Neha Saoji, Martin Maurer

Presented April 14th, 2015

RECOMMENDATION: Add to Watch list

Company Overview:

Lear Corporation is a company that manufactures and distributes automotive seating and electrical distribution systems. Lear Corporation is headquartered in Southfield, Michigan, USA, and also a Fortune 500 company. The company owns 221 manufacturing facilities in 36 countries, and over 125,000 employees around the globe. The current CEO is Mathew Simoncini, who has a tenure of 3.5 yearsas CEO with the company. Jeff Vanneste serves as the CFO and has been with the company for 3 years. Lear Corporation is the industry leader in automotive seating segment and one of the four big players in automotive electrical segment. Revenues generated by the 2 segments are 75% for seating and 25% for electrical respectively. In addition, the revenue source is well diversified geographically - United States, Mexico, China and other European countries.

Macroeconomic and Industry Overview:

The improved macroeconomic condition since year 2008 gives the entire automotive industry an opportunity to size up. The overall vehicle production has increased in Asia Pacific, United States and Europe from 2009 to 2014, and the vehicle sales in United States has been rising up steadily during the past five years. Among all the regions, Asia Pacific is the fastest growing market with an annualized 5.7% growth till year 2018. The stable GDP growth also leads people to spend more on vehicle purchase potentially. Transformation in electrical segment and more added features to support new automotive trends are also factors that potentially contribute to the high growth in electrical part of automotive industry.

Financial Analysis, Projection, and Valuation:

For the financial analysis of Lear Corporation, a discounted cash flow approach and a comparable companies approach were used to determine the stock value. To determine companies that were relatively comparable, we selected public companies from both seating and electrical segments. Four multiples were selected and an implied stock price of $92.27 was determined based on the different weight that we allocate on each ratio. Based on the weighted average cost of capital (WACC) we calculated as 11.02% and add 1% as the business risk premium, so we have 12.02% as our discount rate and 3% as our terminal growth rate. The discounted cash flow from Lear Corp gives us an implied share price of $93.09. Both the above valuation methods yield a lower implied stock price than the market stock price of $114.30.

Risks:

There are a variety of risks associated with Lear’s business and operation environment. Fluctuating macroeconomic factors can affect consumer behaviors on purchasing vehicles, which makes the industry quite cyclical. Moreover, losing contracts with automotive producers will have huge impact on Lear’s revenue and the company has huge reliance on GM and Ford. Furthermore, even though the company already owns technology patents and joint ventured with Chinese companies, the unforeseen market from electrical segment and Asian market may pose some uncertainties in market growth, which may prevent Lear Corporation from pursuing certain business opportunities. Finally, the low-cost nature and mature market of auto-seating industry may act as a huge barrier for the company to grow rapidly.

Recommendation:

Our recommendation is to add to the watch list at the current stock price of $114.30 with our projected price from the DCF model as $93.09 and from comparableanalysis as $92.27. We believe the company owns a solid business model and potential growth in Chinese market and electrical segment, however, the overvalued stock price drives us to the decision to add the stock to the watch list.