Morgan Stanley sets Lear stock at Overweight

On Friday, JPMorgan (NYSE:JPM) adjusted its price target on Lear Corporation (NYSE:LEA), a leading global supplier of automotive seating and electrical systems, to $162 from the previous target of $166. The firm maintained its Overweight rating on the stock. This revision follows Lear's second-quarter earnings release, which showed performance largely in line with expectations, contrasting with the anticipated disappointments from most auto parts suppliers this quarter.

Lear's second-quarter revenue was reported at $6,012 million, closely matching the Bloomberg consensus projection of $6,042 million and JPMorgan's estimate of $5,995 million. Core Operating Income (COI) also aligned with estimates, reaching $302 million with a 5.0% margin. Despite these in-line figures, Lear's free cash flow generation fell short of expectations, recording an inflow of $170 million compared to the anticipated $271 million, largely due to higher one-time cash restructuring payments.

The company's E-Systems segment experienced notable sales growth, outpacing global light vehicle production by approximately 7 percentage points. This boost was attributed to the backlog on key platforms, including new business on General Motors (NYSE:GM)' Ultium platform. However, Lear's management anticipates a moderation in E-Systems revenue outperformance in the latter half of 2024 due to a softer outlook for EV production.

Lear's Seating business is also seeing momentum, with the company winning about 80% of the programs it has quoted. Lear's thermal comfort business is expected to benefit from the launch of two innovative products: ComfortFlex and ComfortMax, which are currently not generating revenue but have potential applications across multiple Ford (NYSE:F) platforms starting around 2026.

Regarding the full-year outlook, Lear's management has slightly lowered its revenue forecast for 2024 to approximately $23,450 million from the previous estimate of about $24,300 million. The projection for COI has been adjusted to around $1,115 million with a margin of 5.1%, down from the earlier $1,230 million.

The company now targets a 2024 EBITDA of approximately $1,755 million, compared to the prior estimate of about $1,870 million, and has revised its full-year adjusted free cash flow (FCF) outlook to around $560 million from $675 million.

In light of the second-quarter performance and the updated full-year guidance, JPMorgan has also adjusted its forecasts.

The firm's 2024 EBITDA prediction has been revised to $1,779 million from $1,821 million, and the FCF outlook for the year has been updated to $568 million from $621 million. These changes have also impacted JPMorgan's 2025 forecasts, which serve as the basis for Lear's valuation, leading to the reduced December 2024 price target.

In other recent news, Lear Corporation reported a steady Q2 performance, with revenue surpassing $6 billion and core operating earnings holding at $302 million. The company's adjusted earnings per share rose by 8% to $3.60, a result of increased net income and the effect of share repurchases.

Lear has introduced innovative products such as the ComfortFlex and ComfortMax Seat, aiming to generate over $1 billion in revenue from thermal comfort by 2027.

Lear has also recently acquired WIP Industrial Automation, enhancing its automation and AI capabilities. The company is broadening its customer base, marking significant growth in the Chinese market and initiating plans to establish capacity in Eastern Europe and Brazil.

Despite a projected 3% decrease in global production for 2024, Lear remains optimistic about its growth prospects. Full-year revenue forecasts range between $23.2 billion and $23.7 billion. The company's strategic initiatives include the deployment of Thermal Comfort Systems (NYSE:FIX) Products and an expansion of automation capabilities.

Analysts from various firms have noted Lear's expansion into new markets and its focus on innovative products. However, they also highlighted challenges such as a slower ramp-up and demand for EVs in the US and Europe, and extensive downtime in North America and Europe.

Despite these hurdles, Lear is confident in its long-term growth, targeting a 29% market share in seating with thermal comfort playing a significant role in this growth.

InvestingPro Insights

In the wake of JPMorgan's price target adjustment on Lear Corporation, current metrics from InvestingPro show a company that is navigating a challenging industry landscape. With a market capitalization of $6.79 billion, Lear trades at a P/E ratio of 12.47, which is notably lower than the adjusted P/E ratio for the last twelve months as of Q2 2024, suggesting a more attractive valuation in recent times. The company's revenue growth for the same period stands at a modest 5.22%, reflecting the steady yet unspectacular expansion within the automotive components sector.

One of the key InvestingPro Tips highlights that Lear has been a consistent performer when it comes to dividends, maintaining payments for 14 consecutive years, a fact that may appeal to income-focused investors. Additionally, analysts predict the company will be profitable this year, which is supported by a positive return on assets of 4.18% over the last twelve months as of Q2 2024. However, with seven analysts revising their earnings downwards for the upcoming period and the company trading at a high P/E ratio relative to near-term earnings growth, investors should consider the potential for short-term headwinds.

For those interested in a deeper dive into Lear Corporation's financial health and future prospects, InvestingPro offers additional insights and tips. By using the coupon code PRONEWS24, readers can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, accessing a total of 9 additional InvestingPro Tips to further inform their investment decisions.

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