Lear Earnings: Revenue Growth Despite UAW Strike but Margin Improvement Dinged by Headwinds

Narrow-moat-rated Lear LEA reported third-quarter earnings per share before special items of $2.87, beating the $2.61 FactSet consensus by $0.26 and rising $0.54 from $2.33 EPS reported a year ago, despite the UAW strike. Results were also still affected by customer slowdowns from the chip shortage and other supply-chain disruptions. Revenue increased 10% to $5.8 billion from $5.2 billion last year, 3% above consensus. Organic revenue rose 7%, 1 percentage point less than an 8% increase in light vehicle production adjusted to Lear’s customers, mainly due to the GM truck plant labor stoppage. Revenue growth was supported by new business and cost recoveries.

Adjusted EBIT of $267.1 million with a 4.8% margin, improved 14% from $234.6 million and a 4.5% margin reported a year ago, beating consensus by 6%. Production disruption and inflationary cost pressures were offset by backlog and operating efficiency. Free cash flow was $251 million versus $112 million in the prior year on favorable working capital and improved earnings. As a result, Lear returned $120 million to shareholders with a $0.77 per share quarterly dividend and $75 million in share repurchases.

Despite a $25 million third quarter and a $325 million fourth-quarter estimated revenue impact from the UAW strike, management raised 2023 guidance. Revenue guidance at the midpoint is up $500 million from $22.7 billion to $23.2 billion while EBIT is up $30 million to $1,105 million. We raised our 2023 estimates with revenue at $23.1 billion, up from $22.7 billion, and adjusted EBIT at $1,085 million, up from $1,010 million, reflecting the low end of guidance due to uncertainties including the UAW strike, the chip shortage, geopolitical turmoil, inflationary cost pressures, and softening economies in major auto markets.

Our new fair value estimate is $169 as the time value of money added $4 while changes to our model added $2. The 4-star-rated shares of Lear currently trade at a 21% discount to new our fair value.