Lear ( LEA) (Part 2)
For the third quarter ended Oct. 2, Lear reported an almost tripling of net income to $95.3 million, or $1.76 a share, from $24.6 million, or 32 cents a share a year ago. Adjusted earnings per share was $2.28, far exceeding the analyst consensus of 95 cents a share. Net sales increased more than 10% to $2.8 billion, from net sales of $2.5 billion a year ago.
Citi analyst Itay Michaeli tells clients that he thinks Lear's multiples have been depressed following its 2009 financial restructuring, and that there's room for multiple expansion with earnings production and earnings recovery in the U.S. in 2010 and 2011, and as more "traditional" equity investors come back to Lear.Stephanie Link, director of research for TheStreet, thinks Lear has one of the most compelling stories in the auto supplier group. Link says the company's healthy balance sheet could lead to a large buyback program of about $1 billion in size in early 2011. The company current holds a number two position in the $45 billion to $50 billion global automotive seating market. Barclays analyst Brian Johnson expects "modest" earnings growth in 2011 based on "flattish" production in North America and Europe and benefits from $1 billion in new business and exposure to growth in the emerging markets -- offset by large production decline in GM's GMT900 trucks -- an area that Lear supplies. Currently Moody's has a Ba3 corporate family rating with positive outlook for Lear. Moody's analysts Timothy Harrod and Michael Mulvaney tell investors that they expect Lear to continue to benefit from the gradual recovery of the auto industry in the intermediate term. "However, Lear will continue to be faced with the challenges of high customer concentrations to the Detroit-3" and Europe, they predict. In 2009, 36% of the company's net sales were attributable to GM and Ford, and about 47% of net sales were attributable to Europe. Moody's expects 2011 European demand may be "adversely impacted" by government austerity measures. Looking at M&A combinations involving Lear, Langan from UBS thinks that its seating division would be good for Magna and that Magna is in a good position to finance a deal. In 2007, Lear's management favored leveraged buyouts said Langan; management's equity would vest immediately upon sale, he explained. He also sees that Lear's seating division could be attractive to Faurecia; however, to finance a deal, the latter would probably require significant equity. As with Magna, Lear may be willing to accept courtship from Faurecia, says Langan. Finally, he believes that Lear may find Leoni's auto electrical division attractive and says it has the cash to go through with an acquisition. However, Leoni trades at a premium to Lear, so the latter may meet some resistance from the former. Langan says that Lear has been performing very well since its emergence from bankruptcy, for about a year now, and doesn't see significant risk in 2011 from the company's GM exposure.
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