About Lear Corporation

There seems to be a prevailing trend related to where many of the larger automobile industry leaders are headquartered. While there’s plenty of Pizza, as we’ve discussed in previous articles, in this state, there’s an even larger affinity and set in stone overall economic development in where else but the great (and cold) state of Michigan.

Headquartered in Southfield, Michigan, Lear, unlike Ford, Chevrolet and General Motors doesn’t put vehicles together, but rather manufacturers and sells ultra-critical components within said vehicles; seats.

Specifically, it is apparently the only seating supplier with in-house electronic and software capabilities, which means it’s not at all shocking that the company’s largest clients include Ford, General Motors, Volkswagen, Daimler among a few high-profile customers in the auto industry. In addition to its specialization in seats, Lear also does some damage (not literally) in the e-systems space, more specifically electrical distribution systems and even the implementation of software in its customer’s vehicles, which we can only assume has grown to become more and more popular.

Lear is definitely moving with the times, as vehicles of all types are becoming more and more automated.

While the company also tinkers with vital electrical components of vehicles, seats seem to be its bread and butter but it’s a great sign that the company is finding other avenues to travel down and use to diversify its primary revenue stream while remaining focused in the auto industry.

Now, let’s get a glimpse into the company’s finances and try to determine whether or not this company is worth putting on your Christmas stock market wish list.

Lear’s stock financials

Trading at a share price of just a bit more than $132, Lear has a market capitalization of $7.81 billion, a price-to-earnings (P/E) ratio of 33.89 and shells out an annual dividend of $3.08 to its existing shareholders.

On a P/E basis alone, the company’s stock is overvalued, or trading at disproportionately high levels relative to what it’s actually worth.

We’re definitely not in the market for overvalued stocks, especially as company valuations continue to come down back to earth amidst the current recession.

This isn’t the kind of start we had hoped for but let’s let the rest of the company’s financial figures tell its side of the story.

The company’s balance sheet presently consists of around $13.3 billion in total assets mixed with approximately $8.7 billion in total liabilities. 

This is a very bland balance sheet in the sense that the company’s total assets outweigh its total liabilities by a wide enough margin to keep us comfortable but close enough that if the economy gets worse and stays entrenched for the next handful of years, this is the kind of company that could accumulate a lot of debt quickly and could turn its balance sheet upside down, meaning liability-heavy as opposed to asset-heavy. 

While we see this as a rather unlikely scenario, it’s definitely something potential and current investors should keep an eye on if the state of the economy continues to worsen.

However, all in all, we are currently not overly concerned with Lear’s overall balance sheet and capital structure but one should definitely keep an objective eye on it if they’re considering a long-term investment in Lear Corporation’s stock.

According to Lear’s income statement, the company’s total revenue over the last five years has been boring, which we have no gripes with as its better to be invested in a company that is able to generate consistent revenue and can produce during times of turmoil as opposed to scrambling to buy shares in the company later on.

Sometimes it pays to be stable and boring.

Nevertheless, the company’s total revenue over the previous five years has been pegged between nearly $17.1 billion (2020) and $21.1 billion (2018), which we’d say is fairly consistent, especially given the better eras the economy has seen.

According to the company’s cash flow statement, net income generation hasn’t been an issue for Lear as its net income has remained positive each year since 2017 (or within the five year interval) as well as the fact that its total cash from operations has been in the green as well, ranging from $663 million (2020) up to almost $1.8 billion (2017). 

Lear’s stock fundamentals

You’d think that an industry leader in the automobile seating and related electricity space would’ve been able to eke out a net profit margin higher than that of its peers and their averages.

You’d be correct if you were referring to Lear.

Particularly, the company’s trailing twelve month (TTM) net profit margin stands at 1.44% to the industry’s average of -19.97%, according to TD Ameritrade’s platform.

I guess the automobile seating industry isn’t exactly known as one that produces vast amounts of profit, however, we are happy to find that Lear’s annual net profit margin is substantially greater than (and positive for that matter) the industry’s average.

On the basis of TTM returns on equity, assets and investment, Lear’s TTM returns on assets are slightly lower than that of the industry average, as are its TTM returns on investment as well. If there was a greater discrepancy between Lear and the industry’s return metrics, favoring the industry, we’d have our fair share of concerns. Yet, these metrics are quite close to each other and over time, so long as Lear continues to increase its capital efficiency and with that its market share, we don’t have a long list of qualms with its current return metrics and moreover confidence that the company will be able to outperform the industry average in this regard in the future.

Should you buy Lear stock? 

While sometimes it might make sense to invest in a company’s stock if it has an elevated price-to-earnings ratio, namely if its current growth or prospects of rapid future growth warrant such a metric, Lear doesn’t fit in this category.

It is a mature company in a mature industry.

There’s nothing wrong with that, however, it speaks to our biggest gripe with investing in this company’s shares at the moment; they’re too expensive given its current P/E ratio. Additionally, with the current state and overall cyclicality of the car market, Lear is definitely not immune to outside pressures from this sector.

We’ll definitely look further into investing in shares of Lear stock as the stock market overall continues to trade down and valuations follow. 

However, for now, we think it is most appropriate to give this company’s stock a “sell” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.