Lear Corporation (LEA) is a Fortune 500 company that designs and manufactures seating and electrical systems for popular automotive brands. I am bullish on the stock.
Underlying Industry Demand
Lear’s operations are ancillary to the automotive industry, causing a significant interlinkage. The auto industry is in great shape going into 2022, with GDP anticipated to grow by 3.8% this year. Furthermore, consumers’ utility is peaking as a consequence of greater certainty of future income as we exit the hard-policy pandemic stages.
The company has produced strong growth across the globe, with 12% year-over-year growth in North America being the most notable. Lear also grew by 5% in Europe and 4% in Asia during the same period. The firm’s global growth allows it to provide shareholders with more consistent value than before, subsequently enhancing the prospects.
Valuation Prospects Are in Check
Many analysts are cautious about the stock’s valuation, with Wells Fargo stating the following: “We see the 2022 production recovery and related margin expansion as already reflected in consensus. Our 2022E EPS of $15.00 is below [the] consensus of $15.40. The stock is trading at ~6.5x 2022E EBITDA, which is consistent with its five-year average and above its 10-year average of 5.2x.
“Further multiple expansion likely depends on further wins in e-powertrain or high voltage systems, yet we are cautious given the large number of suppliers entering this space.”
I’m afraid that I’d have to disagree with the narrative. We need to look at Lear’s price/sales and price/cash-flow ratios instead of its EBITDA because it’s less susceptible to volatility and earnings accruals.
Compared to broadly accepted benchmarks, Lear is trading at low price/sales and price/cash-flow multiples. Its trailing 12 months’ price/cash-flow ratio is 12.4x, and its price/sales ratio is 0.6x. The sector median price/sales ratio is double that.
In addition, it has to be considered that we’re in a high price multiple environment, which provides cause for downward mean reversion to be delayed.
Momentum Pattern
An additional attraction for investors here could be the momentum pattern that Lear stock has recently formed. The stock is currently trading above its 50-, 100-, and 200-day moving averages, suggesting that this is a popular stock under investors, and it will most likely take a catalyst to change the tide.
Wall Street’s Take
Turning to Wall Street, Lear has a Hold consensus rating, based on three Buys, five Holds, and one Sell assigned in the past eleven months. The average Lear Corporation price target of $189.22 implies 4.4% upside potential.
Concluding Thoughts
Lear is interlinked with the auto space, which is an industry set to thrive under growing economic conditions. The stock itself is of good value if we consider the P/S and P/CF ratios. Lear is also a popular stock among most investors if we consider the momentum pattern it’s formed lately.
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