Lear Corporation - an Undervalued Opportunity
I’m not sure what disclaimers I’m supposed to put before writing a
post on a stock position, but I don’t own any shares of Lear, nor do I
work for them. I’m just a b-school kid who found a blog topic today.
Looking through stocks today to add to a new (pretend) portfolio, I
happened to stumble across one of the best investment opportunities
I’ve seen in a while - Lear Corporation.
Lear Corp. is, according to Reuters, “…a tier 1 supplier to the
global automotive industry.” Basically, they manufacture parts that
the big 3 assemble into vehicles, like automotive seat systems and
electrical distribution components. One of the great Midwestern (their
corporate office is located in Southfield, Michigan) manufacturing
companies that’s still kicking!
The company’s been in the news lately for it’s aggressive moves to
increase it’s stock value, primarily through a $1 billion
share-repurchase program and dramatic increases in the company’s
dividend. The share-repurcahse program was recently accelerated, and
the company now expects to complete the buyback by 2014 (instead of
the originally scheduled January 2016). The company’s dividend was
recently increased from 14 cents to 17 cents.
Why have these steps been taken? Simply put, the company’s
shareholders are not happy, and want to see management taking greater
steps to increase shareholder value. On February 12, two shareholders,
Marcato Capital Mgmnt. and Oskie Capital Mgmnt. (representing about
5.6% of shares outstanding) issued a statement explaining their
problems with the company’s capital structure.
"Specifically, we believe the company’s current undervaluation
reflects investors’ distaste for the company’s practice of stockpiling
an increasing net cash balance, along with concern that the company
may be willing to make costly acquisitions or invest in other
low-return projects at a time when the repurchase of Lear’s
undervalued stock would be far more attractive to the long-term equity
value of the company.
"It is our contention that the company’s recent announcement — to
accelerate the pace of its existing stock repurchase program and raise
its dividend — is insufficient… Simply put, we view Lear as
dramatically overcapitalized. (You can read the rest of the letter here: http://www.4-traders.com/LEAR-CORPORATION-13367/news/Lear-Corporation-Marcato-Capital-Management-and-Oskie-Capital-Management-Outline-Potential-Value-C-16044485)
Looking at Lear’s fundamentals, there’s good reason for their concern.
With a debt-to-equity ratio of 17.96, far below it’s peers, and an
even lower total debt to total asset ratio of 7.94, despite it’s high
revenue and net income, it’s clear that Lear is *under*leveraged and
What does this mean for investors, though?
Beyond their capital structure, which leaves much to be desired, Lear
has some very strong fundamentals. The company’s net income has been
increasing strongly over the last 3 years and the last 5 quarters. Its
net profit margin is 8.83%, its return on investment is a fantastic
80.66%, and it’s earnings per share are $13. Despite all of this,
because of the lack of investment in shareholder value, the company is
dramatically undervalued, trading well below it’s historical multiple
of 5.5X EBITDA (as mentioned in the shareholder’s letter above). It’s
P/E ratio reflects this - at 4.09, it is well below it’s competitors,
despite its significant strengths.
Now that Lear’s shareholders have been taking strong steps to force
management to place more emphasis on shareholder value, the stock
price may begin to reflect more of Lear’s strengths. If the stock is
as undervalued as investor’s believe, and if it’s performance is as
strong as it’s fundamentals indicate, then there is every reason to
believe the stock will appreciate strongly in the next 6 months to a
https://www.google.com/finance?q=NYSE%3ALEA&ei=Cnw1UaCYLJSO0QHWiwE - Stock
Profile on Google Finance
https://www.google.com/finance?q=NYSE%3ALEA&ei=9Hc1UciCIdGp0AGOOQ - Lear’s
Quarterly Income Statement
http://www.zacks.com/stock/news/92815/lear-speeds-up-share-repurchase - Lear
Speeds Up Share Repurchase (Zacks.com article)