Lear Gains From Stronger Demand For Pickups, Luxury Vehicles

Sep. 5.13 | About: Lear Corporation (LEA)

The U.S. automotive industry is witnessing healthy growth with total sales up 8.5% through July. [1] One company that often benefits from a strong automotive market but does not get enough attention is Lear Corporation (NYSE:LEA). Lear is one of the world's largest manufacturers and distributors of automotive interiors. In addition to providing seating systems, the company also provides electrical distribution systems to automakers. The seating segment accounts for a little more than half of the company's valuation, as per our estimates.

In 2012, the company derived 19%, 18% and 11% of its revenues from GM (NYSE:GM), Ford (NYSE:F) and BMW, respectively. All these companies have outpaced the overall automotive market this year. The fact that Lear's three biggest customers are all performing strongly is only benefiting the company. In the latest quarter, revenues surged 12% prompting Lear to further raise its guidance for the remainder of the year. The strong demand for cars as well as demand for upscale automotive interiors bode well for Lear's profitability.

More Content Per Vehicle?

The average price of common car seats is between $900 and $1,200 and that of medium-grade cars is between $1,350 and $1,700. The average price of top notch luxury seats is over $1,900. The seating equipment that Lear makes is preferred for high-end cars and pickups rather than economical budget cars.

The American car market has rebounded strongly after crashing in 2009 with the last 2-3 years seeing double digit growth. However, the rate of growth could plateau once the market size nears the pre-recession levels. As a result, car manufacturers such as GM, Ford and Honda (NYSE:HMC) are now turning their attention toward reviving their luxury brands. The luxury car market jumped 12% to 1.6 million units in 2012 and sales in 2013 have kept pace with the overall automotive market.

Last year, GM announced an ambitious plan to double the sales of its Cadillac within three years starting 2012. In fact, Cadillac sales are up 30% this year on new introductions such as the ATS and the XTS sedans last year. [2] Furthermore, GM intends to triple the sales of Cadillac to 100,000 in China by 2015 after getting a permit to manufacture vehicles locally.

Even Ford is trying to revive its Lincoln brand with mixed success so far. Even if Lincoln fails to generate optimal sales, Ford is doing pretty well as a company. The automaker is making good, fuel efficient cars with sales up 12.9% through July in the U.S. In China, Ford's monthly sales continue to increase by more than 40%. In Europe, the automaker has been able to post positive sales in the last couple of months despite a decline in the overall automotive market. Thus, the demand for Ford cars should be steady in the next few years. This is definitely advantageous to Lear as well.

Besides luxury cars, pickups are doing great too. The housing rebound is fueling growth in pickup trucks, which are used extensively for construction purposes. A major reason why the sales of GM and Ford have outpaced that of the overall market is because these automakers have a strong presence in the pickup segment. The average price of pickups is generally higher than that of mainstream cars and these generally deploy more seating per vehicle.

Thus, the future growth of Lear in North America could come from providing more content per vehicle (i.e. to pickups and luxury cars) rather than from the sheer increase in the number of vehicles sold. There is also a downside protection for Lear since the company supplies automotive interiors to pretty much every major automaker in the world. Even if one automaker is overtaken by some other automaker, Lear still benefits.

We estimate a $72 price for Lear Corporation, which is about 5% above the current market price.

Disclosure: No positions.