Lear Corporation: A Bull To Reckon With In The Automotive Industry

Includes: AXL, GNTX, LEA
by: Naomi Lazarus

Even though the advancement in technology has aided in increasing the quality and durability of automobiles, there will always be the need for replacement parts and this is where the Automotive Parts industry comes in. Lear Corporation (NYSE:LEA) operates in this industry with its focus mainly on seating and electrical distribution systems. The Tier 1 supplier was founded in 1917 and currently has a market cap of $6.56 billion with its stock trading in the range of $71.00.

The Seating segment makes up 76% of the company's sales while the Electrical Power Management Systems makes up the remaining 24%. Lear is among the few companies that has been benefiting immensely from the growth being experienced in the automotive industry as it continues to release positive earnings reports.

With its most recent positive earnings release that resulted in the company's management raising the company's 2013 outlook, the stock has experienced a huge flow of positive earnings revisions from various analysts. This company's stock has experienced a bullish run for quite some time now.

Lear's second-quarter 2013 financial results

The company's second-quarter fiscal 2013 earnings release showed a solid beat with the company's EPS at $1.62, beating analyst estimates by $0.25 for a 20% increase in comparison to the same quarter the previous fiscal year. This is mostly attributed to significant decrease in share count.

The report showed net sales at $4.1 billion, which exceeded the analyst estimate of $3.9 and shows a 12% increase in comparison to the same quarter of the previous fiscal year. As a result of the acquisition of Guilford, a fabric manufacturing company which expanded the company's product offerings and higher production on the company's key platforms, the Seating segment reported a top line growth of 9.9% at revenue of $3.1 billion.

The EPMS segment recorded a 19.8% growth as it reported $1.0 billion revenues, which was also impacted by the addition of new business and increased production on key platforms. The company's adjusted earnings saw an uptrend of 71.6%, which is impacted by increased sales and improvement in operations. There was significant sales growth in the over 35 countries the company operates in with China recording 11% increase in production, followed by North America at 6%, Europe and Africa 2%. The company reported a decline in Selling, General and Administrative (SG&A) expenses with a Free Cash Flow [FCF] of $73.90 million.

Share Repurchase

Lear carried out a share repurchase program worth $500 million from the first quarter of fiscal 2011 through 2012. Presently, the company has in place an Accelerated Share Repurchase [ASR] program that will see the company repurchasing $1 billion worth of shares, which is to run through March 2014; $200 million shares were repurchased in first quarter of fiscal 2013, with $800 million targeted to be completed by March, 2014.

Lear has announced additional share repurchase of $750 million making a total of $2.25 billion share repurchases from the first quarter of fiscal 2011 to date.

Future outlook

As a result of the company's positive second-quarter earnings, management has raised its 2013 revenue guidance from $15.0 - $15.5 billion to $15.8 billion. Its operating earnings guidance was raised to $750 - $800 million, a difference of $25 million.

Industry vehicle product was raised 1% to 16.2 million units in North America, 1% to 19.2 million units in Europe and Africa. Guidance was slightly lowered in industry vehicle production in China with the guidance now at 18.7 million units.

Comparable peers

Lear has close comparable peers that include notable names like Gentex Corporation (NASDAQ:GNTX), the Zeeland, Michigan-based manufacturer of automatic-dimming rear-view and side-view mirrors and camera-based lighting and systems. Gentex is currently trading in the $21 range with a market cap of $3.31 billion.

In its bid to further diversify its product offering and increase the company's profitability, the management consented to the acquisition of Homelink, a company that has made a name for itself in garage door opener manufacturing. Gentex has been able to grow its operations at a faster pace in comparison to most of its peers. It recently released its second-quarter 2013 earnings report, which showed a beat on analyst estimate for EPS. It reported an EPS of $0.36, exceeding the estimated $0.32 by $0.04. The company's revenue rose by 2.4% at $287 million.

Gentex is one company that is synonymous with strong growth, competitive dividend payments and solid free cash flow. Over the years, the company has maintained zero debt except for the recent $300 million it is borrowing in order to complete the $700 million acquisition of Homelink. The acquisition is expected to be closed by September, 2013.

With the company's product offering not exclusive to United States, it has been able to maintain huge presence in Europe where approximately 41% of the company's shipments go. It also maintains significant presence in Asia Pacific/Other. With the continued improvement in the European economy and the increasing demand for cars in China, there is huge growth potentials for Gentex in Europe and Asia Pacific.

American Axle & Manufacturing Holdings, Inc. (NYSE:AXL), currently trading in the $20 range with a market cap of $1.5 billion, is a U.S.-based new entrant in the automotive parts industry. Also a Tier 1 supplier, it offers driveline systems, axles and chassis with other related components designed for light trucks and SUVs.

American Axle has recorded a bullish run for quiet some time now. The company reported a better-than-expected earnings of $0.34 cents, above the analyst estimates of $0.30, even though it represented a 38.2% decrease when compared with the same quarter the previous fiscal year. Revenue was different as the company reported an 8.1% increase, comparing the quarter's revenue of $799.6 million to $739.8 million reported in the same quarter of the previous year. The increased revenue is attributed to the impact of the recovering North American light truck market and the launch of the company's new products geared toward fuel efficiency, minimal emissions and overall driving safety.

Bottom line

Lear currently has strong tailwinds that are propelling the company's stock toward greater heights, even as it currently trades in reasonable valuation. With the company's management continually working toward maintaining a strong balance sheet, growing the company's profitability and maintaining its competitive position is solidly assured.

Gentex hopes to further drive the company's growth, profitability and investors' returns through the Homelink acquisition. Even with the pricing pressure being put on suppliers by auto makers, Gentex has maintained a strong footing in the industry it operates in as it continues to pay attractive dividends with a lot of potential upside growth.

Axle has dipped its business foot in diverse product offerings, with core technology and customer diversification its main focus. With this unique business strategy and the strong relationships it currently maintains with a good number of automakers like Renault, Tata, Mahindra, Cherry, Nissan and others, Axle has a lot to offer investors in the long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.