Lear: In the Driver's Seat

02/26/2018 5:00 am EST


John Reese

Founder and CEO, Validea.com And Validea Capital Management

To select stocks for his buy list, John Reese assesses the criteria used by the market's most legendary investors. Here, the editor of Validea reviews Lear Corp. (LEA), which earns a 100% ranking based on the growth strategy of Martin Zweig.

Lear Corporation (Lear) is a supplier to the global automotive industry. The Company is engaged in supplying seating, electrical distribution systems and electronic modules, as well as related sub-systems, components and software, to automotive manufacturers.

The company designs and delivers seating components, including seat covers and surface materials. It also provides the design and development of electrical distribution systems and electronic modules.

Based on the Zweig model, the P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. Lear's P/E is 9.7 based on trailing 12 month earnings, while the current market PE is 25. Therefore, it passes the first test.

Another important issue is that the rate of quarterly sales growth should be rising. To evaluate this, the change from this quarter last year to the present quarter (15.5%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (10.1%) of the current year. Sales growth for the prior must be greater than the latter. For Lear, this criterion has been met.

The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. The stock passes all three tests.

The Zweig strategy also compares the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Lear passes this test, which means that it has good, reasonably steady earnings.

Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five year period. One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. Again, Lear passes these criteria.

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