Downside To Lear’s Valuation If Global Automotive Growth Slows Down
One of the leading suppliers of automotive interiors, Lear Corporation’s (NYSE:LEA) business depends on the global demand for vehicles. Considering a slowdown in the global market as a result of a slowdown in crucial markets, there could be a considerable downside to Lear’s valuation.
In the world’s largest vehicle market, China, the passenger vehicle sales are up 15.6% year-over-year through November to 21.7 million units, buoyed by government tax breaks, and high discounts offered by dealers. The government halved the 10% purchase tax on cars equipped with 1.6-liter engines or smaller engines in October of last year, in response to a period of slow growth in the country’s vehicle market. This is why the results so far this year in the country’s passenger vehicle market have been exceptionally positive on a year-over-year basis. Over 70% of cars sold in the country qualify for the incentive, which helps customers save up to $1,500 on a new vehicle purchase. SUVs and Crossovers have been the biggest gainers in China, growing by 40-50% year-over-year through the first eleven months of the year. However, going into 2017, this growth might stall as the country will lap the tax breaks offered last October. If the government does not extend the tax breaks, growth could drop to zero or slightly above zero next year.
On the other hand, passenger vehicle sales have remained relatively flat in the U.S. this year after consecutive years of growth. This is as the growth rate has stalled after refilling of fleet has substantially taken place since 2011. This cycle could continue in the next couple of years, slowing overall global automotive growth.
If the global automotive market grows at a CAGR of only 1% through 2016-2021, as opposed to the currently estimated CAGR of 3%, there could be a 10% downside to our current price estimate for Lear Corporation. However, the slow down in growth in vehicle sales in developed markets might be offset by growth in markets such as India, and even Brazil and Russia, which might be looking to recuperate as the oil prices rise again.
Have more questions on Lear Corporation? See the links below.
- How China Is A Major Boost For Lear Corporation Right Now
- Lear Raises Guidance On Solid Operational Performance
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- Growing Content In China Could Add To Lear’s Growth This Year
- Lear Earnings Review: Profit Rises On Solid Performance Across Seating And Electrical Segments
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- How Has Lear Corporation’s Revenue And EBITDA Composition Changed Over 2011-2015?
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- Why Lear’s Stock Has Appreciated 90% In The Last Five Years
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