Reasons Why You Should Retain Lear (LEA) in Your Portfolio
Lear Corporation LEA to benefit from the M&N Plastics, Kongsberg, Xevo and IGB buyouts. However, ramping up investments in research and development (R&D) and technology, and increases in hourly wages are concerning.
The Zacks Consensus Estimate for Lear’s 2024 revenues and earnings per share is pegged at $23.28 billion and $12.02, respectively, implying a rise of 11.42% and 37.8%, respectively, from the year-ago reported number.
Let us discuss the factors that highlight why investors should retain the stock.
Growth Indicators
Lear is riding high on acquisitions. The buyout of M&N Plastics has increased the vertical integration in Lear’s E-Systems unit. The Kongsberg acquisition has strengthened Lear’s Seating business and positioned it as the only seating supplier with in-house capabilities in heating, ventilation, lumbar and massage. The deal has added innovative technologies to differentiate Lear’s product offerings, thereby enhancing both top- and bottom-line growth.
The acquisition of Xevo has enhanced Lear’s capabilities in software, services and data analytics, in turn bolstering its market position in connectivity. The more recent buyout of IGB has further expanded Lear’s product offerings in the growing thermal comfort solutions (“TCS”) market. Pro forma 2022 revenues for the TCS business were $550 million and Lear expects this to increase to $1 billion by 2027.
Rising consumer demand for vehicle content— requiring signal, data and power management— and increasing electrification efforts by the company bodes well. Lear's E-Systems segment is driving the company's growth strategy with recent expansions in Morocco and China, alongside business awards and upcoming opportunities. These efforts position Lear to achieve a $1 billion sales backlog for E-System for the third consecutive year, reflecting its integral role in the company's success. Frequent business wins because of innovative product launches like Battery Disconnect Units and Intercell Connect Boards are likely to boost the segment’s revenues.
Lear’s strong financials bode well. The company has $3 billion in total liquidity, including around $980 billion in cash/cash equivalents. It has improved its debt maturity profile and has no outstanding debt maturities till 2027. The company’s debt-to-capitalization of 35.7% is also manageable. Lear's investor-friendly moves of returning excess cash to shareholders via dividends and share repurchases preserve shareholder value and instill confidence. In the first nine months of 2023, the company returned roughly $138 million to shareholders through share repurchases. Lear had about $1.1 billion left in its current authorization for buyback at the end of the third quarter of 2023. Its return on equity of 14% compares favorably with the industry’s 4.8%.
A sales backlog of around $2.85 billion through 2023-2025 is likely to buoy the top line of the firm. Full-year 2023 net sales are expected within $23,100-$23,300 million, up from $20,900 million in 2022. The company’s cash flow performance is benefiting from the Lear Forward plan. Operating cash flow for 2023 is projected within $1,230-$1,270 million, up from $1,021 million generated in 2022. The firm’s Connection Systems business is on track to grow to around $750 million by 2025, representing a 3-year CAGR of 17%.
Concerns
Lear remains committed to ramping up investments in R&D and technology. Increased spending to support electrification is expected to dent the company’s near-term margins. The company has been struggling with wage inflation. This year, the company saw significant increases in hourly wages in Mexico and Eastern Europe. These pressures seem to continue next year. Commodity cost inflation, a tough labor market and forex woes pose concerns.
Key Picks
LEA currently carries Zacks Rank #3 (Hold).
Some better-ranked players in the auto space are Volvo VLVLY and Toyota Motor Corporation TM, each sporting Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for VLVLY’s 2023 sales and earnings indicates year-over-year growth of 4.2% and 65.6%, respectively. The EPS estimates for 2023 and 2024 have increased by 28 cents and 13 cents, respectively, in the past 30 days.
The Zacks Consensus Estimate for TM’s 2023 sales and earnings indicates year-over-year growth of 10.6% and 29.7%, respectively. The EPS estimates for 2023 and 2024 have increased by 28 cents and 4 cents, respectively, in the past 30 days.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Toyota Motor Corporation (TM) : Free Stock Analysis Report
Lear Corporation (LEA) : Free Stock Analysis Report
AB Volvo (VLVLY) : Free Stock Analysis Report
