Lear: New Seating Technology on Display at Investor Day, Highlighting Our Narrow Moat Rating

Narrow-moat-rated Lear LEA put seating technologies on display at its investor day, highlighting FlexAir, seat component modularity, and INTU seating. Lear’s moat results from intellectual property intangible assets and switching costs. Automakers pay vendors for technologies, like Lear’s, that differentiate vehicles, reduce weight, or lower cost. While one innovation does not make a moat, Lear’s pipeline of new technologies creates a stream of intellectual property that flows into an economic moat. Due to changes in our model, we have raised our fair value estimate to $162 from $150. The 3-star-rated shares of Lear currently trade at a 13% discount to our new fair value estimate.

Due to management’s improved outlook for customer production, the firm raised 2023 guidance including revenue forecast at $22.35 billion-$23.05 billion (prior $21.2 billion-$22.2 billion) and adjusted EBIT at $1.01 billion-$1.14 billion (prior $875 million-$1.075 billion). We raised our 2023 estimated revenue to $22.7 billion from $21.6 billion and adjusted EBIT to $1.01 billion from $872 million, the midpoint of revenue and the low end of adjusted EBIT new guidance as we expect the backlog to support revenue but risk from industry uncertainties remains high including, the chip shortage, Ukraine crisis, inflationary cost pressures, and possible recession in major auto markets.

We increased our seating margin assumptions on average by 60 basis points to 7.6% from 7.0% during our Stage I forecast. Lear’s new technologies improve manufacturing efficiency and operating leverage from increasing volume support margin expansion. Historically, seating adjusted EBIT margins had a 15-year high, low, and median of 8.3% (2018), 3.0% (2009), and 6.3%. By 2027, management targets 8.5% to 9.0%. Our 7.5% seating normalized midcycle assumption is up 50 basis points. On a consolidated basis, this raised our Stage I average margin to 6.1% from 5.7% and our normalized midcycle to 6.5% from 6.0%.