Lear Earnings: Solid Performance From Volume, Mix, and Backlog as Chip Shortage Lessens

Narrow-moat-rated Lear LEA reported first-quarter earnings per share before special items of $2.78, beating the $2.57 FactSet consensus estimate by $0.21 and climbing $0.98 from the $1.80 reported a year ago, when the chip crunch was much worse. Results continue to be affected by customer production shutdowns and, to a lesser degree, the chip crunch. Revenue increased 12% to $5.8 billion from $5.2 billion last year, beating consensus by 4%. Organic revenue rose 14%, 6 percentage points above the 8% increase in global light-vehicle production adjusted to Lear’s customer base. Revenue growth was supported by new-business backlog, product mix, higher customer production, and cost recoveries.

Adjusted EBIT of $263.4 million and a 4.5% margin jumped 43% from $183.7 million and a 3.5% margin reported a year ago, beating consensus estimates by 8%. Unpredictable customer call-offs and inflationary cost pressures were offset by backlog, volume increase, and cost recoveries. Free cash flow was negative $36 million versus $221 million in the prior year on higher working capital as receivables surged toward the end of the quarter, partially offset by improved earnings. Despite the cash burn, Lear returned $72 million to shareholders through its quarterly dividend of $0.77 per share and $25 million in share repurchases.

Management’s 2023 guidance was unchanged, with revenue at $21.2 billion-$22.2 billion, adjusted EBIT at $875 million-$1,075 million, and free cash flow guidance at $375 million-$525 million. We estimate 2023 revenue at the midpoint and adjusted EBIT at the low end of guidance, as we expect backlog to support revenue, but risk remains high from industry uncertainties, including the chip shortage, the Ukraine crisis, inflationary cost pressures, and possible recession in major auto markets. Our new fair value estimate is $150 per share, as the time value of money added $2. The 3-star-rated shares currently trade at a 15% discount to this.