Lear: Supplier Is Poised to Benefit When(ever) Auto Production Increases

Jun.30.11 | About: Lear Corporation (LEA)

Lear Corporation (NYSE:LEA) is a supplier to the global automotive industry focused on seating and electrical power management systems. Lear provides products to almost every major automotive manufacturer in the world and operates in 34 countries.

Lear was negatively impacted by the global economic slowdown. From 1999 through 2007, global auto production levels increased from 53.4 million units to 68.7 million. However, since 2007, the global automotive industry has suffered. In 2008 and 2009, automotive production in North America and Europe experienced the steepest decline in history. North America production fell 50%, from 17.2 million units in 2000, to 8.6 million units in 2009. The decline in Europe was less pronounced but still significant at over 20%, from 20.2 million units in 2007 to 15.6 million units in 2009.

This resulted in multiple bankruptcy filings. Chrysler filed on April 30, 2009, and General Motors (NYSE:GM) filed on June 1, 2009. And on July 7, 2009, Lear filed. On November 9, 2009, Lear emerged from Chapter 11 bankruptcy proceedings with a much stronger balance sheet. Lear finished 2009 with a net cash position consisting of $1.6 billion of cash and $972 million of total debt.

As of April 2, 2011, Lear has $1.7 billion of cash and $700mm of debt. Further, in August 2011, Lear instituted a quarterly dividend of $0.125 cents. This equates to an annual dividend yield of approximately 0.90%.

Lear is trading at $53.50 per share - implying a market capitalization of $5.6 billion and an enterprise value of $4.7 billion. On a multiples basis Lear trades at 0.38x trailing sales, 5.5x trailing EBITDA, 4.6x forward EBITDA, and 10.3x forward earnings.

With North American light-vehicle production still hovering at a seasonally adjusted annual rate of 12 million units, 30% below peak levels, there is ample runway in front of Lear as auto production increases over the next few years. Further, with a clean balance sheet, Lear has financial flexibility and can withstand the production volatility that may occur.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.