Why Lear Has Been Growing By More Than The Global Vehicle Production Growth

Lear Corporation (NYSE:LEA) is one of the leading automotive interiors suppliers in the world, specializing in seating and electrical systems. The stock has climbed 27% in the last 52 weeks alone as the company, flush with cash, has looked to acquire businesses that have augmented its sales as well as margin. Lear’s top line has expanded at a CAGR of 8.8% between 2010-2015, much more than the nominal 4% growth in the global vehicle production during this period. A great upside for Lear is that its business is strategically well spread out. The company’s business is well-balanced in terms of product segment, customer and platform mix, and by geography:

1. The fact that Lear’s business is spread across geographies is important given that if the market is down at one place, the company could extract growth in some other market. The pie chart below shows how Lear’s revenue comes from different markets; the revenue distribution is also closely associated with the concentration of vehicle production across different markets. The only anomaly is lower revenue from Asia, where a massive >50% of the vehicles are being made, mainly as China forms a bulk of this.                                                                            Lear is picking up its sales in Asia. Of the 17% of the sales contributed by Asia, approximately three-fourths is from China. Lear has seating facilities across 12 cities in China, electrical facilities across 5 cities, and one administrative/technical facility in Shanghai. Revenue from China formed ~12% ($2.1 billion) of Lear’s top line in 2015, and non-consolidated sales in the country were another $1.5 billion. The good news for Lear is that it has solid relationships with the domestic manufacturers as well as foreign automakers in China, which protects its growth, despite the shift in market-share trends (domestic manufacturers are growing in market share in China).

   Lear’s equity earnings from its Chinese joint ventures doubled to $50 million in 2015 from $24 million in 2010. Lear now expects these joint ventures to continue to grow strong and surpass $3 billion in sales by 2018, based on its 3-year non-consolidated sales backlog of almost $1 billion.

2. The advantage that Lear has over individual automakers is that it caters to a number of clients. Ford, GM, and BMW together formed 53% of the company’s net sales last year. In addition, the company also supplies automotive interiors to Daimler AG, Fiat Chrysler Automobiles, Hyundai Motor Company, Jaguar Land Rover, Peugeot S.A., Renault-Nissan Alliance, and the Volkswagen Group. And in China, a considerable ~40% of its seating business is with major domestic automakers. So, one could think that even if one automaker, or if foreign automakers aren’t faring well in the country, Lear could make up sales from another automaker, due to the growth in business at some other automaker. And considering that Lear has a strong brand recognition and ranks among the top seating and electrical automotive interior businesses, its strong relationships with automakers could mean that despite a declining market size, it could achieve growth by growing market share.

Lear has been growing by more that the growth in the global vehicle production levels over the last few years due to its well-balanced business, and also because of growth in content per vehicle. The company has been making acquisitions such as that of Eagle Ottawa, which is the world’s largest supplier of luxury automotive leather, which has boosted the top line and also been accretive to margins. Lear is the world leader in luxury and performance automotive seating, providing interiors to all the leading premium automakers such as Audi, BMW, Mercedes-Benz, Cadillac, Alfa Romeo, Ferrari, Jaguar Land Rover, Lamborghini, Lincoln, Maserati, and Porsche. This helps in boosting Lear’s content per vehicle, and in turn, the top line, which is why the company has been able to grow by more than the growth in worldwide vehicle production levels.

Have more questions on Lear Corporation? See the links below.

• Downside To Lear’s Valuation If Global Automotive Growth Slows Down
• How China Is A Major Boost For Lear Corporation Right Now
• Lear Raises Guidance On Solid Operational Performance
• What Will Be The Jump In Lear’s Valuation If Electrical Margin Jumps By More Than Expected?
• What Will Be The Jump In Lear’s Valuation If Seating Margin Expands By More Than Expected?
• 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
• What’s Lear Corporation’s Fundamental Value Based On Expected 2015 Results?
• Where Will Lear’s Revenue And EBITDA Growth Come From Over The Next Three Years?
• What Is Lear Corporation’s Revenue And EBITDA Breakdown?
• Lear Corporation: Year In Review
• By What Percentage Have Lear’s Revenues And EBITDA Grown Over The Last Five Years?
• How Has Lear Corporation’s Revenue And EBITDA Composition Changed Over 2011-2015?
• What Is Lear Corporation’s Geographical And Client-Wise Revenue Breakdown?
• Why Lear’s Stock Has Appreciated 90% In The Last Five Years

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