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Lear (LEA) Down 11.2% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research
·4 min read

A month has gone by since the last earnings report for Lear (LEA). Shares have lost about 11.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Lear due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Lear Q4 Earnings & Revenues Down Y/Y

Lear's fourth-quarter 2019 adjusted earnings came in at $2.64 per share, down the $4.05 recorded in the prior-year quarter. However, the bottom line surpassed the Zacks Consensus Estimate of $2.25. Higher-than-expected revenues in both its Seating and E-Systems segments led to this outperformance.

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At the end of fourth-quarter 2019, adjusted net income was $161 million compared with the prior-year quarter’s $261 million.

In the reported quarter, revenues declined 2.51% year over year to $4.8 billion. This downside resulted from lower production on key Lear platforms and net foreign-exchange rate fluctuations, partly offset by the addition of business and the Xevo acquisition. However, the top line surpassed the Zacks Consensus Estimate of $4.5 billion.

The company’s core operating earnings declined to $241 million from the $389 million reported in fourth-quarter 2018.

Segment Performance

In fourth-quarter 2019, sales in the Seating segment totaled $3,629 million, down 2.82% year over year. Adjusted segment earnings were $212.7 million compared to $299.4 million in the fourth quarter of 2018. However, it topped the Zacks Consensus Estimate of $201 million in the quarter. Adjusted margins for the Seating segment was 5.9% of sales.

Sales in the E-Systems segment totaled $1,188.5 million, marking a decline of 1.62% year over year, in fourth-quarter 2019. Adjusted segment earnings amounted to $91.9 million in the quarter compared to $136 million in the fourth quarter of 2018. However, it surpassed the consensus mark of $71 million. For the E-Systems segment, adjusted margins were 7.7% of sales.

Share Repurchase

During the fourth quarter, Lear repurchased 215,200 shares for $25 million. At the end of the quarter, the company had remaining share-repurchase authorization of $1.2 billion, which will expire on Dec 31, 2021. The figure represents approximately 15% of Lear’s total market capitalization at current market prices.

Financial Position

The company had $1,487 million of cash and cash equivalents as of Dec 31, 2019, compared with $1,493 million recorded as of Dec 31, 2018. It had long-term debt of $2.29 billion as of Dec 31, 2019, compared with $1.94 billion recorded as of Dec 31, 2018. The long-term debt to capital ratio stands at 33.8%.

At the end of the quarter, Lear’s net operating cash inflow was $485 million compared with $758.2 million as of Dec 31, 2018. During the period, its capital expenditure amounted to $193.8 million, up from the $184.3 million recorded in the prior-year quarter. Free cash flow came in at $291.2 million, down from the year-ago figure of $573.9 million.

2020 Outlook

For full-year 2020, Lear expects net sales of $19.4-$20.2 billion. Adjusted net income is anticipated in the band of $780-$880 million. Further, the company projects capital spending of roughly $600 million, while free cash flow is expected between $600-$700 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Lear has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Lear has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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