Lear Corporation A Good Buy at $88?

After a 37% decline in Lear Corporation‘s (NYSE: LEA) stock since the beginning of 2020, at the current price of $88 per share, we believe LEA’s stock has a good upside potential, after the coronavirus situation ends, though the stock is likely to remain around the current level for now considering the impact of the ongoing coronavirus crisis. The current stock price of $88 is in fact lower than the stock price since 2017 to the beginning of the coronavirus crisis. We believe that after the coronavirus crisis, LEA’s stock is likely to perform better than its peers like Advance Auto Parts and the market which has seen a small recovery in recent weeks. Our dashboard What Factors Drove -47.8% Change In Lear Corporation Stock Between 2017 And Now? provides the key numbers behind our thinking and we explain more below.

Some of the stock price fall from $169 at the end of 2017 to $136 at the end of 2019 is justified by the roughly 40% decrease in Lear Corporation’s revenues from 2017 to 2019 (due to higher operating cost over the last 2 years), this effect was reflected in the net income, which fell from $1.3 billion in 2017 to $0.8 billion in 2019. This was further accentuated by a 3% fall in Total revenues, which decreased from $20.5 billion in 2017 to $19.8 billion in 2019. The EPS fall of 33% was slightly lower than fall in net income margin (40%), as it was partially offset by a 10% reduction in shares outstanding between 2018 and 2019.

The fall in EPS was partially offset by a rise in LEA’s P/E multiple, which rose from 9x at the end of 2017 to 10.6x at the end of 2019. This reflects over a 18.7% increase from the end of 2017 till end of 2019. The multiple has dropped to 6.7x currently which reflects a 23.4% decrease from end of 2017 to April 2020. This rise in P/E multiple between 2017 and 2019 was not due to a change in the company’s fundamentals, as even though the EPS fell in 2019 the market had higher expectations of future profits from the company. On the contrary, the decline in P/E multiple in 2020 is due to the impact of coronavirus, which we explain below.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. LEA’s stock is down by about 28.5% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 12%. Moreover, about 70% of LEA’s total revenue comes from the US region, Europe, and Asia which has been the worst impacted regions by the outbreak. Lower consumer spending and consumption would lead to lower demand for automobiles, in turn affecting LEA’s revenues.

We believe Lear Corporation’s Q1 results will confirm the trend in revenues. It is also likely to accompany a lower Q2 as well as FY’20 guidance. If there isn’t clear evidence of the containment of the virus at the time of the earnings announcement, we believe there is a possibility that LEA’s stock could see a further downside. However, if there are signs of abatement of the crisis by the time Q1 results are announced, the company’s stock could see a major upturn, mainly because the stock has declined sharply. With a 28.5% decline in its stock price since January 31, 2020, LEA has underperformed Advance Auto Parts (-12.8%) and the S&P 500 (-12%). But in the current scenario, we believe Lear’s stock is likely to remain around its current levels, with a a good upside post coronavirus.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture of historic crashes and how the sell-off during early March compares.

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