Lear is well positioned with seating and electrical architecture to capitalize on global growth in premium vehicles

Business Strategy & Outlook

Lear’s revenue will grow in excess of increases in annual worldwide light-vehicle production. The company is well-positioned to capitalize on several trends in the global automotive industry, including automakers’ focus on high-quality interiors, premium-vehicle segment growth, the proliferation of automotive electronics, and battery electric vehicles. Lear competes in the markets for vehicle seating and automotive electrical and electronic architecture. A culture of continuous innovation, high switching costs for customers, highly integrated engineering relationships with customers, and lengthy vehicle programs provide Lear with sticky market share. The premium-vehicle segment leads the way in the proliferation of electrical circuits, electronic devices, and digitalization. All-electric and electric hybrid vehicles also contain higher power-management content, the production of which is being driven by more stringent fuel economy and emissions regulations. Additionally, premium-vehicle seating contains more features and uses higher-quality materials, commanding higher pricing. Lear is the global leader in premium seating.

Vehicle propulsion and dynamics, which at one time were mechanically, hydraulically, and vacuum-driven, have become electronic, requiring electrical power, computer processing, and signal processing to communicate and interact with other vehicle systems. Hybrid and all-electric powertrains require more robust electrical architecture to support the power consumption of the battery-driven electric motor. Vehicle autonomy exacerbates the need for more complex electrical and electronic architectures. Lear is the number-two company in the global automotive seating market, but management believes it is the global leader in luxury- and performance-vehicle seating. The company has the fourth-largest market share in the electrical segment. Even though there is limited synergy between the two sides, Lear is well positioned with seating and electrical architecture to capitalize on global growth in premium vehicles, bolstering the thesis that revenue should outpace global growth in worldwide vehicle production.

Financial Strengths

The company maintains a solid balance sheet and liquidity that, relative to many other parts suppliers, makes for strong financial health. From a credit perspective, the company did not reduce debt outstanding but made $705 million worth of share repurchases in 2018. Even so, Lear’s capital structure was slightly underleveraged. Given the company’s ability to generate solid free cash flow, Lear could take advantage of the benefits of modestly higher financial leverage without incurring the pitfalls of excessive debt in a cyclical industry. Lear entered and exited bankruptcy protection in 2009, prior to which, the company averaged total debt/total book capital of around 65%. Using the Morningstar method of calculating total debt/total capital where capital includes the equity market capitalization instead of the book value of equity, the pre-bankruptcy average was 46%. Since 2011, Lear has maintained much lower leverage with a 31% book total debt/total capital ratio and a 16% total debt/Morningstar total capital ratio. Using total debt minus cash to arrive at a net debt/total capital ratio, the average is 0.4% due to the company’s relatively large cash position. Lear funds its working capital needs with its free cash flow, cash balance, and revolving line of credit. As of the end of 2021, total liquidity including cash and available revolving credit facility was roughly $3.3 billion ($1.3 billion cash and $2.0 billion revolver availability). In the third quarter of 2021, Lear amended its revolver, increasing it to $2.0 billion from $1.75 billion and extending the maturity to October 2026 from August 2024.

Bulls Say

Lear’s above-industry growth rates are supported by a growing global premium-vehicle segment and increasing penetration of automotive electrical and electronic content.
A culture of continuous innovation at Lear enables regular and consistent product and process development, commercializing technology that generates solid margins and returns on invested capital.
Automakers’ growing use of common architectures benefits Lear because of its global footprint.

Company Description

Lear designs, develops, and manufactures automotive seating and electrical systems and components. Seating components include frames and mechanisms, covers (leather and woven fabric), seat heating and cooling, foam, and headrests. Automotive electrical distribution and connection systems and electronic systems include wiring harnesses, terminals and connectors, on-board battery chargers, high voltage battery management systems, high voltage power distribution systems, domain controllers, telematics control units, gateway modules, vehicle positioning for automated and autonomous driving, embedded control software, cloud and mobile device software and services, and cybersecurity.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.