Look at Lear: Top Scores in Auto Parts

12/20/2017 5:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Quadrix is our quantitative ranking system that asses dozens of fundamental and technical factors. Few stocks look better in Quadrix than automotive supplier Lear (LEA) which earns the maximum Overall score of 100, asserts Richard Moroney, editor of Dow Theory Forecasts.

Lear offers a rare blend of rising profit estimates, cheap valuation, outstanding operating momentum, and bullish share-price action. The stock scores in the top quarter of our research universe for Momentum, Value, Earnings Estimates, and\ Performance. The same can be said of just 20 stocks in the S&P 1500 Index.

Lear generates steady growth, with per-share profi ts up in 14 of the past 15 quarters and sales up in 20 of 21 quarters. Operating profit margins have expanded in 15 straight quarters. The company supplies seats (78% of sales in the first nine months of 2017 and 67% of operating profit) and electrical systems (22%, 33%) to automakers.

Part of Lear’s consistent operating momentum derives from improving global car and truck sales, up in each of the past seven years. Vehicle production is expected to fall 4% in North America in 2017 but rise 2% worldwide, estimates industry researcher HIS Automotive.

Meanwhile, a couple factors should keep working in Lear’s favor. First, new vehicles are using more electrical components.

Second, vehicles with the highest dollar content for seats and electrical systems — such as SUVs and crossover utility vehicles — are seeing more sales growth than passenger cars. Lear’s content per vehicle has increased 6% in North America and 9% in Europe and Africa so far this year.

The shares have surged 31% in 2017, nearly double the S&P 1500’s 17% advance. But at 11 times trailing earnings, the stock trades in line with its fi ve-year average and 27% below the median for S&P 1500 auto-parts suppliers.

Lear typically increases its quarterly dividend in February. The dividend was raised at least 12% in each of the last six years, including a 67% increase last year. Although free cash flow has slipped 10% in 2017, dividend outlays represent just 12% of trailing earnings, positioning Lear for another big hike in 2018.

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