Will Covid Recession Have A Major Impact On Lear?

The automotive and ancillary industry is rattled, and Lear Corporation (NYSE:LEA) is no exception. A Covid recession will impact the company’s revenues, cash flows, and ability to pay dividends. Fading consumer demand, reduced discretionary spending, and stay-at-home orders will result in minimal demand for automobiles over the near future. But we believe Lear will sail over a Covid recession, as we detail below.

Trefis analyzes the potential Impact Of The Covid-19 Recession On Lear with a focus on the company’s liquidity reserves and concludes that Lear has a steady financial position and a Covid-19 recession will not have a major impact on the company’s cash reserves in the near term.

Impact On Lear’s Revenues

• If the outbreak of the virus increases, automobile production will see a fall leading to lower demand for Lear’s Seating and E-systems until the situation improves. As a result, Lear’s revenues could decline by about 30% in 2020, on account of weaker demand, potential supply constraints, and a reduction in discretionary spending.
• In addition to that, the company derives more than 75% of its revenues from North America and Europe, which has become the epicenter of the outbreak with the US recording the largest numbers of Covid-19 cases across the globe.
• Even with the slow reopening of the economy as lockdowns beginning to lift, social distancing measures may continue for months, which could impact people buying new cars and leading to lower production and weak demand for auto ancillary products.

Impact On Lear’s Cash Flows

• Lear’s cash flows are likely to plunge in 2020 due to a steep fall in revenues and reduced profitability.  
• The company might have to offer its products at a discount to keep the cash flowing. 
• Elevated costs, coupled with lower revenues, will hurt the company’s bottom line. 
• Despite these measures, we estimate that Free cash flow from operations (FCFO) will go down from $1.3 billion in 2019 to $-434 million in 2020. Also, with expected capital expenditures of $302 million for the year, FCFO-CapEx will be $-736 billion in 2020.

Cash Balance Impact

• This will lead to a 2020 cash balance of $0.8 billion, which is lower when compared to 2019. 
• This is with the assumption that the company will not pay dividends or re-purchase shares. While that may be a disappointment for existing investors, these moves by the company will be essential for its long-term survival.

Conclusion

To sum things up, Lear can weather a recession through mid Q3 2020 and a 30% decline in revenues by cutting Capex, eliminating share repurchases, and suspending dividends. 

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

An alternative scenario for Lear’s cash flows with a 40% decline in revenue instead is detailed as a part of our full analysis.

While Lear seems to be in a relatively comfortable position to sail through the Covid crisis, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For greater insight in to the automobile space, you can see a comparative analysis of Daimler vs. Volkswagen.

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