2019 | 2020 | ||||||
Price: | 110.84 | EPS | 15 | 16.63 | |||
Shares Out. (in M): | 62 | P/E | 7.4 | 6.6 | |||
Market Cap (in $M): | 6,915 | P/FCF | 8.6 | 8.6 | |||
Net Debt (in $M): | 1,060 | EBIT | 1 | 1 | |||
TEV (in $M): | 8,486 | TEV/EBIT | 6 | 5.8 |
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Lear is a Tier 1 auto supplier with approximately $20bn in annual revenues. The business is split into two divisions with seating systems accounting for about ¾ of the revenues and E-Systems making up the remainder. The company is the 2nd largest seating supplier wit a mid-20’s global market share and, in general, seating content per vehicle has risen as mix shift has gone to larger vehicles (SUV/CUVs light trucks). E-systems produces components for vehicle electrical distribution systems that route power throughout the vehicles, which, similar to seating, also benefits from recent trends within the auto industry including electrification, rising luxury share and larger vehicles.
The stock is down from over $200 last year to $110 today as declines in global auto production, most significantly in China, have impacted earnings results and forecasts. The long-awaited cyclical roll in global auto SAAR seems to be well underway with only a few areas of resistance (US still over 16MM units) left to falter. IHS revised down its 2019 industry production forecast from a year over year decline of 2% to down 3% with the biggest changes coming from China (which represents over 25% of the market by volume).
For Lear, however, things have been compounded by a reset in expectations in their higher margin E-systems business. Part of the bull case over a year ago with mid-teens margins and the potential for higher growth from exposure to electrified vehicles, E-systems was the more exciting story while seating was seen as steady but always at risk of price deterioration. To the Bulls surprise, however, E-systems has performed worse than seating, with margins falling from 14% in Q2 2018 to 8% in the most recent quarter and expected to fall further in Q3. The Company blamed several issues for the decline, some temporary some longer term, but management finally admitted that a quick bounce back isn’t in the cards and that low double digit margins could be years away.
Given the current set-up, however, I’m not sure you need a return to double digit margins in E-systems for the stock to work. The company is facing a cyclical downturn not a secular decline and the margin reset is now largely in the numbers. With the stock at $110 and just over $1bn in net debt the company is trading at an EV/EBITDA of 4.4x (incl. minority interest and minor pension underfunding). Current guidance puts free cash flow at 675-775 or a 10-12% yield at current levels. The company has been buying back shares including $160MM in the most recent quarter and almost $700MM over the last twelve months reducing the share count by 6.5%.
Street estimates now forecast flat operating margins next year on 3.7% revenue growth. The company called out $75MM in annualized cost savings by 2021 as part of their $200MM 2019 restructuring spend with 80% in-place by 2020. For reference $75MM at a low 20’s tax would be just under $1.00/share to earnings and 40bps to consolidated margins.
Any indication that 2020 will show some stability to global auto numbers could get the stock trading closer to 10x earnings or over $150. In the meantime the company's balance sheet isn't stressed and they have the ability to buyback shares while they wait for the auto cycle to turn.
-Outlook for global autos stabilizing; Free cash flow
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22 | |
Needham and Jefferies launched coverage today of TTGT with $11 and $12 price target respectively. Both of their numbers look pretty doable by the company for 2014 and 2015. | |
21 | |
we added after talking to the CEO yesterday. the main source of revenue is associated with its database of 13.5m registered vendors vs traffic. the company only has about 10% of revenue that is related to banner ads / branding. a drop in traffic could be an issue for this revenue but the company is nowhere close to being sold out on its available inventory of impressions so traffic going up or down marginally doesn't impact this revenue line much either. bottom line is that the company has historically not monetized its user base and traffic well and the IT deal alert is a big step in improving that. | |
20 | |
http://www.businesswire.com/news/home/20140619006404/en/TechTarget-Reaffirms-Q2-2014-Full-Year-2014
Company reaffirms quarterly and full year guidance and basically says what we suspected, their revenue is not directly correlated to traffic in general and Google search traffic in particular.
Hope the Street Sweeper covered their short earlier today. | |
19 | |
BTW the article also clearly means to imply that the insiders knew about the traffic changes and were dumping stock, but I am pretty confident that the secondary was filed before the Panda changes and were due to Polaris liquidating its 2001 and 2003 vintage funds that held TTGT shares and were already running on extensions from their 10 year lives. | |
18 | |
Copia, I do think when they give the 90% organic figure, that means that only 10% of their traffic is from paid sources such as Google PPC ads. So that includes revenue from algorithmic search results.
That said, I think that article was dumb. TTGT is not overly SEO dependent and its revenue model does not depend on impressions like DMD or clickthroughs/cookie stuffing like SALE. After all, if their revenue was shrinking while organic traffic was growing nicely in 2013 I am not sure if follows that the revenue will suddenly plunge if search visibility goes down. I think their revenue is largely dependent on the marketing budgets of big IT players and how much they are willing to spend to sponsor white papers and webinars and TTGT's direct sales execution and I don't think it is directly dependent on traffic. | |
16 | |
TTGT is under pressure today from an article in thestreetsweeper.org that says that Google's recent change to its search methodology will result in a 33% drop in traffic to TTGT's websites. Unfortunately what this article fails to mention is that 90%+ or TTGT's traffic is organic so it does not come through the Google channel at all. If let's say 9% comes through Google and that drops by a third, that is a 3% overall drop to TTGT. Compare this with the 35% rate that TTGT's organic traffic is growing year-over-year and you see the result on TTGT will be minimal. | |
15 | |
TTGT reported a big upside surprise to revenue and EBITDA in Q1 driven by the strength in their international business and IT Deal Alert. The stock reacted positively going from $6.35 to $7.80 over a three day period. The company then announced its long awaited secondary offering by the VCs, which served to drive the price down to $6.50. At the end of the day the offering is a positive as it will increase liquidity in the stock and bring onboard three new analysts from solid small-cap focused firms. In the short term, however, the stock got clocked, likely by people who were buying in the offering and wanted to price it as low as possible. | |
14 | |
Weak IT spending has been hurting TTGT for the past two years. It would be tough to verify, but the company is pretty adamant that it is not cannibalization. The core leads business gets to potential customers much earlier in the life of a deal so is complementary to IT Deal Alert which gets there when the deal is close to being consummated. | |
12 | |
Agreed. Hope we both make a lot more money on it... | |
10 | |
Since posting this idea originally much has changed with TechTarget's stock. The company did a self-tender, eventually buying 7.1 million shares of stock at $5 each. Then, on the third quarter conference call, the company CEO guided for 2014 revenues to be up at least 10% over 2013 revenue, which was significantly higher than Street numbers at the time. As a result, the stock moved to $7 per share versus $5 when I originally wrote it up. I am no less enthusiastic about the stock at these levels though. The main revenue driver, a product called IT Deal Alert, is ramping better than plan and will see 300% growth in 2014 at least. I believe the company can double its revenue over the next few years and at the same time, double its operating margins (due to a very fixed cost structure), leading to a 4x growth in profits. This will drive the stock well into he mid-teens and perhaps, t0 $20 a share. | |
8 | |
I don't think that IT Deal Alert is so much cheaper than the core leads product and also very few customers are on it now so I don't think it is cannibalization. Big tech (IBM, oracle, etc) has been doing quite poorly so I believe their marketing budgets have been hit. i am monitoring Greg closely for more positive body language... | |
6 | |
thanks for your reply | |
5 | |
I exclude stock comp and goodwill amortization from my calculation of EBIT. The reason for goodwill is that the company has already paid the price for the acqusition in either stock or cash, and that is reflected in a higher enterprise value due to lower cash and / or more shares outstanding. On the stock comp front, the shares that the company gives its employees are reflected in a higher share count and are thus dilutive to EPS, so I do not ding them twice by charging them on the P&L as well. I know this is an unpopular view on VIC but that is the way I look at things. Not sure what you mean by including or excluding deferred revenue changes on the P&L, but I do not do that in either case.
Jeff | |
3 | |
Thanks for the kind words. Regarding management, I think that the CEO is excellent. I have met him once and spoken with him a few times and I think he has a terrific grasp of his business and a clear vision of where he wants to take the company. On the FCF front, I am taking EBITDA and subtracting CAPEX to get to this number. 2012 FCF will come out near $15m so I am expecting a sharp increase in this metric over the next two years. This is based on 10% revenue growth each year with modest increases in opex so he 72% GM drops a bunch of income to the EBIT line. Of course, the biggest assumption is the revenue growth. I am expecting continued international growth, some traction with the new product, and some normalization of the tech marketing environment to get to these numbers. Let me know if you have any more questions. |
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