Lear Earnings: Chip Crunch Alleviates, and Revenue and Margin Show Solid Improvement

Narrow-moat-rated Lear LEA reported second-quarter earnings per share before special items of $3.33, beating the $3.21 FactSet consensus by $0.12 and jumping $1.54 from $1.79 EPS reported a year ago as the chip crunch alleviates. Results were still affected by customer slowdowns from the chip shortage and other supply chain disruptions. Revenue increased 18% to $6.0 billion from $5.1 billion last year, 2% above consensus. Organic revenue rose 17%, 2 percentage points above a 15% increase in light-vehicle production adjusted to Lear’s customers. Revenue growth was supported by new business, product mix, customer volume, and cost recoveries.

Adjusted EBIT of $301.8 million, with a 5.0% margin, climbed 61% from $187.4 million and a 3.7% margin reported a year ago, beating consensus by 3%. Production disruption, inflationary cost pressures, and slightly dilutive customer cost recoveries were offset by backlog, volume increase, and operating efficiency. Free cash flow was $311 million versus $11 million in the prior year on lower capital spending, favorable working capital, and improved earnings. As a result, Lear returned $73 million to shareholders with a $0.77 per share quarterly dividend and $28 million in share repurchases.

Unchanged 2023 management guidance has revenue at $22.35 billion-$23.05 billion and adjusted EBIT at $1.01 billion-$1.14 billion but added that the midpoint includes downtime due to customer labor negotiations. Our unchanged 2023 estimated revenue is $22.7 billion and adjusted EBIT of $1.01 billion, the midpoint of revenue and the low end of adjusted EBIT guidance as we expect backlog to support revenue, but high industry uncertainties include a customer labor stoppage, the chip shortage, Ukraine crisis, inflationary cost pressures, and possible recession in major auto markets. Our new fair value estimate is $163, as the time value of money added $1. The 3-star-rated shares of Lear currently trade at a 5% discount to new our fair value.