One of the cheapest stocks in our Large Cap 1000 – Deep Value Stock Screener is Lear Corporation (NYSE:LEA).
Lear Corporation (Lear) is a leading global supplier of automotive seating and electrical systems.
A quick look at the company’s share price history (below) over the past twelve months shows that the price has risen 8% and is currently trading at $134, just 2% off its 52 week high of $138.
(Source: Google Finance)
Latest News
On October 26, 2016 Lear released its Q3 2016 earnings results. Highlights included:
- Record sales of $4.5 billion, reflecting continued growth in both segments
- Record net income of $214 million versus $181 million in the prior year, an increase of 18%
- Record core operating earnings of $364 million, an increase of 14% from the prior year, with a record margin of 8.0%, up from 7.4% a year ago
- Earnings per share of $2.98 and adjusted earnings per share of $3.19, up 27% and 25%, respectively, from the prior year
“Our sales and earnings growth, which continue to outpace the industry, reflect the investments that we have made to strengthen our product capabilities and improve our cost structure. In Seating, our unique capabilities continue to drive market share gains. In E-Systems, we are extremely well positioned to capitalize on the rapidly growing vehicle communication and connectivity mega-trend”, said Matt Simoncini, Lear’s president and chief executive officer.
Revenues to Grow by 5% or More Above The Industry Growth Rate
The biggest talking point among analysts during the Q3 2016 Results – Earnings Call was the claim by Matt Simoncini about the company’s revenue growth rate over the next five years.
Simoncini said, “Given our unique product capabilities, including industry-leading cost structure and experienced management team, we expect revenues to grow by 5 percentage points or more above the industry growth rate over the next five years to seven years”.
Based on all of my analysis (below) I tend to agree with him.
Recent Developments
During the quarter, the company entered into a strategic partnership with Tempronics, securing exclusive rights to its thermoelectric seat heating and cooling technology. This partnership will further enhance what is already one of the most complete component capabilities in the industry.
In addition, Lear has recently been awarded multiple 48-volt electrical distribution programs as well as several high-powered programs and the company received its first customer awards for secured gateway communication modules.
When you include these developments with recent accretive acquisitions of Arada Systems and Autonet Mobile and combine it with Lear’s low cost footprint, this will help to ensure the company continues its profitable growth in both its Seating and E-Systems segments.
Shareholder Friendly
One thing I always look for in a good company is it’s shareholder friendliness. While a lot of investors focus solely on dividends as a measure of shareholder friendliness, that’s only half the picture. It’s important to take a look at the company’s strategy when it comes to its own share repurchases. In a lot of cases companies make the mistake of repurchasing shares when the share price is high, this is a mistake. Share repurchases only make sense when the shares are trading at a discount as is the case with Lear.
In February, Lear’s board of directors increased its share repurchase authorization to $1 billion through to December of 2017. During the third quarter of 2016, the company repurchased 1.3 million shares for a total of $153 million, bringing the year-to-date total to 5 million shares or 7% of its shares outstanding at the beginning of the year. Since initiating its share repurchase program in 2011, total cash returned to shareholders was $3.3 billion, when you include dividends.
Lear definitely ticks all the right boxes when it comes to shareholder friendliness.
Growing Revenues
A quick look at Lear’s Q3 2016 results (below) compared to the pcp shows the company’s total revenue has increased by 4% while operating income and net profit have increased 12% and 18% respectively.
| Q3 Results (Amounts in 000’s) | Sep 15 | Sep 16 |
| Total Revenue | $4,526 | $4,330 |
| Gross Profit | $514 | $453 |
| Operating Income | $345 | $303 |
| Net Income | $214 | $181 |
(Source: Company reports, sec.gov)
Strong Balance Sheet
A quick look at Lear’s balance sheet below for the trailing twelve months shows that the company has $1.3 billion in cash and cash equivalents and total debt of $1.9 billion. Whenever you see a company with total debt in excess of its cash & cash equivalents it’s important to take a look at the company’s statement of cashflows (below) to ascertain whether it has lots of free cashflow to pay down this debt, if necessary.
| Quarterly Balance Sheet (values in 000’s) | ||||
| Quarter: | 3rd | 2nd | 1st | 4th |
| Quarter Ending: | 10/1/2016 | 7/2/2016 | 4/2/2016 | 12/31/2015 |
| Current Assets | ||||
| Cash and Cash Equivalents | $1,341,600 | $1,394,700 | $1,174,100 | $1,196,600 |
| Total Current Assets | $6,053,800 | $5,936,200 | $5,775,700 | $5,286,600 |
| Current Liabilities | ||||
| Short-Term Debt / Current Portion of L/T Debt | $41,300 | $34,400 | $29,000 | $23,100 |
| Long-Term Debt | $1,907,300 | $1,916,400 | $1,928,500 | $1,931,700 |
(Source: Company reports, sec.gov)
With a current market cap of $9.3 billion and debt in excess of cash totaling $607 million that means Lear has an Enterprise Value of $9.9 billion. With operating earnings* of $1.49 billion ttm, that means Lear has an Acquirer’s Multiple® of 6.64.
The Acquirer’s Multiple® is calculated as:
Enterprise Value / Operating Earnings*
The Acquirer’s Multiple® uses operating earnings in place of EBIT and EBITDA and is constructed from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up.
* The Acquirer’s Multiple® uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”
Strong Free Cashflow
A quick look at Lear’s statement of cashflows over the trailing twelve months shows that the company had $1.68 billion in operating cashflow and $458 million in capex, or $1.22 billion in free cashflow ttm. That means Lear has a FCF/EV Yield of 12% and provides the company with lots of choices when it comes to paying down its debt, repurchasing shares or paying dividends.
| Quarterly Cashflow Statement (values in 000’s) | ||||
| Quarter: | 3rd | 2nd | 1st | 4th |
| Quarter Ending: | 10/1/2016 | 7/2/2016 | 4/2/2016 | 12/31/2015 |
| Net Income | $214,400 | $282,400 | $248,400 | $235,300 |
| Net Cash Flow-Operating | $276,300 | $529,000 | $288,600 | $585,100 |
| Capital Expenditures | -$118,600 | -$93,600 | -$88,100 | -$158,100 |
(Source: Company reports, sec.gov)
Summary
Lear is cheap on almost every multiple. It’s trading on a P/E of 10, a P/B of 3, a P/S of 0.54, and an Acquirer’s Multiple of 6.64. The company has unique product capabilities, a low cost footprint, a healthy backlog, and accretive acquisitions.
In terms of its fundamentals, Lear has growing revenues, a strong balance sheet and loads of free cashflow. With a buyback yield of 7% ttm and a dividend yield of 1% ttm that means Lear also provides a nice shareholder yield of 8%.
That’s why Lear Corporation is seriously undervalued.
