Lear Corporation New Coverage: $72 Price Estimate
LEAR Corporation (NYSE:LEA) is one of the world’s largest manufacturers and distributors of automotive interiors. Established in 1917, the company has spread its operations across 36 countries with reliable and superior quality products, environmental compatibility and efficiency. Lear’s sales are primarily derived from North America and Europe, which constituted about 39% and 35% respectively to its revenues in 2012. Its main customers are automotive giants such as General Motors, Ford and BMW. These three automakers account for more than half of the company’s sales.
Before 2007, the company was a supplier of ‘total’ interior products and systems, including seating and overhead systems, door systems, floor consoles, instrument panels, and integrated electronics. However, the Interior Systems Division was not profitable as many automakers preferred a wider interiors portfolio. As a result, the purchase of ‘total’ interior products from a single company was discouraged, leading to the discontinuation of the division by 2007.
Today, Lear Corporation is a tier 1 supplier of seating systems including seat structures, seat foam and seat covers and generates nearly 76% of the revenues from them. The company also provides electrical distribution to both traditional and high power hybrid systems. Electrical and Power Management Systems include wire harness, terminals and connectors, junction boxes and wireless remote control devices.
In the seating segment, Lear competes with Johnson Controls (NYSE:JCI), Toyota Boshoku Corporation and Faurecia SA among others. In the electrical power management systems division, it is one of the four suppliers of complete electrical power management systems and competes with Sumitomo Corporation, Delphi Automotive PLC and Yazaki Corporation.
We estimate a $72 price for Lear Corporation, which is roughly 5% above the current market price.
See our full analysis for Lear Corporation
We have broken down Lear Corporation into the following divisions:
Key Value Drivers
Seating Segment To Be Driven By Growth In The North American Luxury Car Market
The average price of common car seats is around $900 to $1,200 and that of medium-grade ones $1,350 to $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 rather than economical budget cars.
Growth in the luxury car market of America, Lear’s largest market, will have a positive effect on its seating content revenues. More than 400,000 new luxury vehicles were sold in the U.S. in the first quarter of 2013, which is the highest sales volume of luxury vehicles in the last six years.
The American car market has rebounded strongly after crashing in 2009. In the last few years, American automakers have been troubled by bankruptcy proceedings and restructuring activities. Similarly, the Japanese auto companies’ finances had been hit hard by events beyond their control. Now, with the operations of these companies in a more stable state, they can focus on resuscitating their luxury brands. The luxury car market jumped 12% to 1.6 million units in 2012 and sales for 2013 are expected to be strong as well as the first half data suggests.
EPMS Market Poised for Growth
The emergence of electric, hybrid electric and other technologies is driving growth in high-power electrical systems and components. Hybrid and electric vehicles offer a significant content opportunity with a potential to more than double the electrical content per vehicle.
There are various factors that could affect the potential size of the market, such as the price of oil, fuel efficiency improvements in its internal combustion engine cars, the cost of batteries, recharging infrastructure, and government incentives. In order to reduce the dependence on oil, governments across the world are providing incentives to both consumers and manufacturers for the adoption of electric cars. In the U.S., for example, the federal government gives tax credits of up to $7,500 for the purchase of “advanced technology vehicles” (this includes EVs). This tax credit may even be increased to $10,000. [1]
There are several other regulations, such as corporate average fuel economy (CAFE) regulations, the Zero Emission Vehicle program (ZEV), and subsidized loans for battery research and the manufacture of electric cars that can accelerate the pace of adoption. Government impetus in setting up infrastructure will be crucial for the growth of the electric vehicle industry, thus boosting the Electrical Distribution Segment of Lear.
In China, the government is investing heavily in setting up a recharging infrastructure. China is already the world’s largest automobile market, and it is growing at a much faster pace than the U.S. It is inevitable then that China will also be the largest market for plug-in vehicles. As Lear expands internationally, China will be an important source of sales for Lear.
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Notes:- Obama makes alternative-fuel vehicle push, March 7, 2013, money.cnn.com [↩]