|Shares Out. (in M):||82||P/E||12.5x||10.1x|
|Market Cap (in $M):||5,261||P/FCF||17.8x||12.0x|
|Net Debt (in $M):||381||EBIT||774||843|
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Lear was last discussed on VIC in 2009. I was writing this up at the end of last month when the stock was $58/share and now is up 11% since then. But I still think the risk/reward is compelling.
Lear is a Tier 1 automotive supplier, which manufactures seats and electrical distribution components for almost all major automotive manufacturers globally. Today, Lear is set to grow EBITDA by 2015 25% from its 2012 level while shrinking its share count 25% over the same time period through buyback programs announced in April 2013. Lear is currently trading at 4.8x 2014E EBITDA, which is a discount to its long-term average of 5.5x. Based on 2015 figures, Lear shares should appreciate by almost 50% in 2014 based on the reduced share count, improved EBITDA and the restoration of its long-term valuation multiple and 75%+ by 2015 based on 2016 figures. By 2015, the company will have a meaningful net cash balance again and be in a position to initiate another accelerated return of capital to shareholders. Further upside is achievable if Lear’s two businesses were separated and its electrical business was sold. Downside risks are manageable given the likely bottoming of European automotive production, the steady continued improvement in US automotive production, and Lear’s continued progress with the launch/changeover of an unusually large number of its vehicles platforms.
Structural Improvements since 2009
From an operating perspective, 2013 will be the low point for the Company’s business and I forecast a material improvement in earnings by 2014 and 2015 accompanied by continued top-line growth.
Free Cash Flow
Benefitting from margin improvement, share count reduction, future free cash flow growth, and a return to Lear’s historical valuation of 5.5x EBITDA, investors should achieve a return of 50-75% from Lear’s current price.
Updates on Citi’s progress repurchasing Lear’s shares in the ASR program, an explanation by Lear management on its future earnings calls of a path to margin improvement in the seating business, and the continued steady improvement in global automotive production levels will lead to the restoration of Lear’s historical valuation multiple and substantial upside to its share price.
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