Lear Corp: Who are You Calling Expensive?

Shares of Lear Corp. (LEA) have returned 66% including reinvested dividends. Has that run made Lear’s stock expensive?

Agence France-Presse/Getty Images

That depends on whom you ask. For Deutsche Bank’s Rod Lache it has, despite the solid earnings numbers that have helped drive Lear higher. He writes:

Lear's Q3 EPS of $1.45 was meaningfully better than our $1.26 est. and cons. of $1.33. Looking at LEA's divisions, the Seating margin came in slightly better than we projected, at 5.4% vs. our 5.2% est. but still down vs. 6.1% in Q3'12. EPMS drove most of the upside with an op. margin of 10.9% vs. 7.5% in 3Q12 (including a 50 bp nonrecurring positive). LEA's overall corp. op. margin came in at 5.4% vs. our 4.7% est. While we were impressed by Lear's Q3, we are lowering our recommendation to Hold based on valuation.

Not so fast, says Citigroup’s Itay Michaeli. He writes: 

In our view, Lear's valuation remains appealing for two core reasons: (1) Lear sports structurally lower capex/sales vs. peers (< 3% vs. ~4+% for peers). That means that for a given EBITDA multiple, Lear will generate higher unlevered FCF than its peers, all else equal. Our 6.0x '14E EBITDA target multiple = ~8% unlevered FCF yield, including restructuring. That Lear's revenue is outpacing the industry while margins are expanding is evidence that capex is appropriately sized. We estimate Lear's '14 unlevered FCF yield is comfortably above peer average; (2) Lear's EPMS segment appears to have crossed the threshold to becoming a double-digit EBITDA margin earner with clear secular growth attributes. We think a 7.5x EBITDA multiple is appropriate based on public peers (Delphi (DLPH)) and past connector M&A. 

Shares of Lear have gained 0.2% to $77.32 at 2:24 p.m. on a day when most auto-part companies are not doing much of anything. Delphi Automotive, the big loser, has dropped 1.1% to $57.39, Johnson Controls (JCI) has fallen 0.2% to $42.94 and Borg Warner (BWA) has risen up 0.4% to $106.70. The big winner: Tenneco (TEN), which has jumped 3.3% $54.65 after reporting better than expected earnings.