In a bid to strengthen its grip on the automotive seating industry, Lear Corporation (NYSE:LEA) recently acquired Eagle Ottawa - the largest supplier of premium automotive leather in the world for over $800 million.
Lear Corporation manufactures and distributes automotive seating and electrical systems to such clients as BMW, Buick, Chrysler, Volvo and Mercedes-Benz among several others. With the acquisition the company is not only looking to enhance its portfolio but also expanding its business operations for clients who frequently opt for luxury in their automobiles.
Lear's revenues experienced a phenomenal growth of 67% during 2009 - 2013, thanks in part to worldwide automotive production that reached 25 million units during that period. As one might expect, Lear's sales are largely dependent on the sales of automobiles it caters to, which in turn are dependent on worldwide automotive demand. Taking advantage of the surge in global vehicle demand, the company expanded its seating business to specifically cater to the luxury sector thus acquiring the biggest company around.
Global Demand for Luxury Vehicles Rises
Worldwide vehicle assembly increased by 4% or 43.1 million units during the first quarter of the current fiscal year. However, the luxury sector expanded at a faster rate. Retail sales of BMW - Lear's largest luxury client - grew by 10% during the month of July which indicates strong demand for luxury vehicles worldwide. The German automaker - which accounted for 10% of Lear's overall sales during the last fiscal year - along with rivals Audi and Mercedes, has exclusively contracted Lear to manufacture seating for some of its more compact models.
Impact of Acquisition on Lear's Revenues
According to some analysts, Lear Corp's seating arm accounts for nearly half of the company's valuation. Eagle Ottawa - which supplies leather for approximately 50% of the cars in the US - produces about a billion dollars in revenue each year. The acquisition of a company that boasts of clients like GM and Ford won't only improve Lear's topline but will strategically position it to significantly enhance its current clientele.
Luxury vehicles come equipped with high seating content per unit. Since Eagle Ottawa specializes in leather - a fabric that is oft used in luxury vehicles - Lear would have the goods to bolster average content per unit. Furthermore, the acquisition highlights Lear's initiative to grow its seating operations all the while reducing costs and ensuring environment friendly production.
As Lear gears up to manufacture systems and seats which can cater to multiple segments - investment and production costs might tumble in the upcoming quarters. The corporation's seating wing experienced a dip in operating margins last fiscal mainly due to manufacturing obstacles faced in the North and South American continent. Nevertheless, margins are likely to surge around 6% due to new manufacturing techniques and higher sales. In addition, analysts predict that the company's long-term margins of its seating division will remain consistent at around 6%. Revenues of the seating division are further expected to rise considering the fact that the company just recently acquired a high-margin business which can help Lear cater more effectively to luxury automakers.
Financial Analysis and Company Rating
Lear Corp's stock is definitely a "buy", especially after the acquisition. The company has performed exceedingly well in some key areas like revenue growth, consistent stock price, growth in net income and earnings per share. Furthermore, the company's overall robust financial standing along with sound debt levels by most calculations add significantly to its worth.
Lear's revenue growth is higher than the industry average of 3.5%. Revenues have risen 10.4% from the same quarter one year ago. The spike in the company's revenues has bolstered earnings per share as well.
Net income has grown from the same quarter one year ago and currently exceeds both the Auto Components Industry average and the S&P 500. Net income has increased from the same quarter one year ago as well currently clocking in at 12.4% or $122 million. In addition, DOE ratio of 0.34 is well below the industry average which indicates successful handling of debt levels.
Going by recent trends, luxury vehicle sales are expected to remain strong worldwide which can significantly benefit Lear Corporation. The stock is a grab at its current price as analysts predict it will yield positive results for early bird investors.
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