Put Your Porfolio in High Gear With Lear

Source: Thinkstock
Source: Thinkstock

Lear Corporation is a very reliable stock to consider owning. The stock has appreciated 45 percent in one year, and I think it can climb higher. Here is what you need to know about the company.

This company designs, manufactures, assembles, and supplies automotive seating, electrical distribution systems, and related components primarily to automotive original equipment manufacturers worldwide. It operates through two segments, Seating and Electrical. The company’s Seating segment provides seats and related components, such as seat structures and mechanisms, seat covers, seat foam, headrests, seat frames, recliner mechanisms, and seat tracks primarily for automobiles and light trucks, compact cars, and sport utility vehicles. Its Electrical segment provides electrical distribution systems for traditional powertrain vehicles, as well as for hybrid and electric vehicles. This segment’s products include wiring harnesses, terminals and connectors, junction boxes, electronic control modules, wireless control devices passive entry systems, remote keyless entry, dual range/dual function remote keyless entry systems, lighting control modules and audio systems, such as amplifiers and vehicle sound systems. But just why am I convinced this stock will move higher?

I see Lear’s stock moving higher because for the most part, the company is firing on all cylinders. In its most recent quarter,Lear reported sales of $4.6 billion, core operating earnings of $275 million, net income of $149 million and adjusted earnings per share of $2.12. These earnings of $2.12 were up a whopping 31 percent year-over-year. These metrics compare with sales of $4.1 billion, core operating earnings of $224 million, net income of $137 million and adjusted earnings per share of $1.62 for the second quarter of 2013.

With the exception of South America, global vehicle production increased across the board. Overall vehicle production was up 3 percent from a year ago, reflecting production increases in each of the three largest automotive markets in the world. Production was up 12 percent in China, 4 percent in North America and 2 percent in Europe & Africa. Production was down 25 percent in South America.

Turning to segment specific results, in the Seating segment, sales were up 12 percent to a record $3.4 billion, reflecting the addition of new business and higher production on key platforms. Adjusted segment earnings were $197 million or 5.7 percent of sales. Earnings increased 10 percent from last year, primarily reflecting the increase in sales and favorable operating performance.

The Electrical segment once again delivered record sales and earnings. Sales grew by 9 percent to a record $1.1 billion, driven primarily by the addition of new business. Adjusted segment earnings were a record $143 million or 12.5 percent of sales. In fact it is the nineteenth consecutive quarter of year-over-year margin improvement. Earnings increased 41 percent from last year. Finally, the company’s cash situation is strong. In the quarter, free cash flow was $137 million, and net cash provided by operating activities was $229 million. Matt Simoncini, Lear’s president and chief executive officer, stated:

“In the second quarter, we continued our positive momentum with record financial results. Our record performance in the quarter reflects the investments that we have made in improving our cost structure and expanding our component capabilities globally. We are well positioned to take advantage of industry trends toward global vehicle platforms, direct component sourcing and increasing electrical content.”

Looking ahead, Lear has increased its full year 2014 financial outlook for sales, core operating earnings and free cash flow. It sees vehicle production of 20.4 million units in Europe & Africa, up 2 percent from the prior outlook, 17.0 million units in North America, up 1 percent from the prior outlook, and 21.2 million units in China, in-line with the prior outlook. Sales in 2014 are expected to be in the range of $17.6 to $17.9 billion, up from the prior range of $17.2 to $17.7 billion. Core operating earnings are expected to be in the range of $975 to $1.025 billion, up from the prior range of $935 to $985 million. Free cash flow is expected to be in the range of $400 to $450 million, up $25 million from the prior outlook. With these results, I can comfortably recommend Lear Stock.

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Disclosure: Christopher F. Davis holds no position in any stocks mentioned and has no intentions to initiate a position in the next 72 hours. He has a buy rating on Lear and a $114 price target.