Lear Company: Acquisitions Will Help Market Share Development Goal (NYSE:LEA)

Elevator Pitch

I’ve a Maintain funding ranking assigned to Lear Company’s (NYSE:LEA) inventory.

I previewed LEA’s Q3 2022 earnings and evaluated the prospects of Lear Company’s E-Methods enterprise phase with my earlier October 18, 2022 replace.

With this newest write-up, I notice the robust market share progress potential of Lear Company’s Seating enterprise phase within the medium to future, however I’m nonetheless cautious concerning the firm’s short-term monetary outlook. Contemplating each long run market share progress potential and the chance of analyst downgrades within the brief time period, I deem a Maintain ranking to be applicable for Lear Company.

Current Acquisitions

Lear Company beforehand disclosed on November 18, 2022 that the corporate had purchased over an organization often known as InTouch Automation. Within the announcement, LEA highlighted that InTouch Automation manufactures “advanced automated testing gear important within the manufacturing of automotive seats” which can increase “Lear’s automation and manufacturing flexibility.”

InTouch is the newest in a collection of acquisitions that Lear Company has performed in latest occasions to assist the long run progress of the corporate’s Seating enterprise. The opposite M&A offers LEA accomplished within the prior 12 months included “Kongsberg Automotive’s Inside Consolation Methods enterprise” and “seating supplies specialist Thagora.”

The addition of Thagora will permit LEA to be extra environment friendly with using supplies reminiscent of leather-based when it makes its merchandise; whereas Kongsberg’s Inside Consolation Methods enterprise to enter a big and fast-growing thermal consolation market. As a reference, Lear Company famous on the Goldman Sachs’ (GS) 14th Annual Global Automotive Conference on December 8, 2022 that the scale of the worldwide thermal consolation market is roughly “$2.5 billion to $3 billion” and increasing at a fee of round “2 factors above automobile manufacturing.”

Transferring ahead, Lear Company is well-positioned to proceed executing on its inorganic progress technique for the Seating phase. In response to the Wall Road analysts’ consensus monetary forecasts drawn from S&P Capital IQ, LEA is anticipated to generate substantial annual free money circulation within the $600-800 million vary between 2023 and 2026. Additionally, Lear Company has no debt due for refinancing for the subsequent 4 years as indicated within the firm’s investor presentation slides. In different phrases, LEA has the monetary capability to interact in potential acquisitions for its Seating enterprise when good alternatives emerge.

Merchandise Leveraged To Sustainability Development

LEA has completely different levers to drive the expansion of the corporate’s Automotive enterprise phase. Considered one of them is acquisitions which I detailed within the prior part of the article; one other lever is new product launches which meet shoppers’ wants and preferences.

Sustainability is a key difficulty that each shoppers and corporates pay loads of consideration to these days, and this hasn’t gone unnoticed by Lear Company. Earlier in late-October 2022, LEA revealed that the corporate launched a brand new “automotive textile that’s totally recyclable” named ReNewKnit.

Notably, Lear Company hasn’t ignored essential options like product attraction and value effectivity when it got here up with ReNewKnit to trip on the sustainability development. LEA had burdened on the GS’ December 2022 14th Annual World Automotive Convention that ReNewKnit is each “a suede product” and likewise “a greater price possibility.”

Market Share Goal

As highlighted within the firm’s investor presentation, Lear Company presently boasts a 25% share of the worldwide automotive seating market. LEA is much more dominant within the luxurious phase with a forty five% market share.

Lear Company has the ambition to seize further market share from its rivals within the intermediate time period. Particularly, LEA’s goal is to attain a 28% market share within the worldwide auto seating business within the subsequent 5 years.

LEA’s market share enlargement purpose appears to be fairly sensible. The corporate beforehand highlighted at Goldman Sachs’ 14th Annual World Automotive Convention that its share of the worldwide auto seating market was once a lot decrease at simply 18% a few years again. This means that Lear Company has efficiently taken market share away from its rivals prior to now, and there aren’t any causes to recommend that LEA cannot do the identical once more going ahead.

Within the previous sections of the present article, I mentioned about acquisitions and new merchandise leveraged to the sustainability development, and these are among the key drivers supporting LEA’s market share progress goal.

There are additionally two different progress drivers for Lear Company’s Seating enterprise. Considered one of them is the structural development of a rise in Content material Per Car or CPV. For instance, there’s rising demand for thermal consolation options in automotive seats, and LEA is in a superb place to capitalize on this development with the mixing of Kongsberg’s Inside Consolation Methods enterprise talked about earlier. One other progress driver is conquest wins. At GS’ December 2022 14th Annual World Automotive Convention, LEA indicated that “prospects are coming to us, asking us to cite rivals’ enterprise” as a result of firm’s superior “high quality and working efficiency.”

Threat Of Additional Analyst Downgrades And Unfavourable Earnings Surprises

The medium-to-long time period progress prospects of Lear Company are respectable as mentioned intimately within the earlier sections of the article. However LEA’s near-term outlook is murky.

Searching for Alpha Information lately reported on December 14, 2022 that Wells Fargo (WFC) lowered its ranking for Lear Company from a Purchase to a Maintain, after WFC “lowered its (2023) mild automobile manufacturing progress forecast to simply 1.8% from a previous 7.1%.”

Up to now three months, the sell-side analysts have lower Lear Company’s fiscal 2023 prime line and normalized earnings per share or EPS by -3.8% and -14.7%, respectively. I do not assume these cuts are ample, contemplating the bearish outlook for the worldwide automotive business subsequent 12 months as highlighted by Wells Fargo.

As such, I believe there’s a excessive likelihood that LEA will witness both additional Wall Road analysts’ goal value & monetary estimate downgrades or earnings misses within the quarters forward. It will doubtlessly result in an additional derating of Lear Company’s inventory value and valuations. It additionally would not assist that LEA’s valuations aren’t precisely low-cost primarily based on a historic comparability. Lear Company’s present consensus ahead subsequent twelve months’ EV/EBITDA a number of of 5.7 occasions (supply: S&P Capital IQ) exceeds its 15-year common ahead EV/EBITDA ratio of 5.3 occasions.

Concluding Ideas

My Maintain funding ranking for Lear Company stays unchanged. I’m bullish on the mid-to-long time period progress prospects of LEA’s Seating enterprise phase, however I’ve a detrimental view of the corporate’s near-term monetary efficiency making an allowance for the general auto business outlook.