Goldman Sachs Buckles In As Lear Growth Accelerates, Upgrades To Neutral

Lear Corporation LEA has consistently beaten earnings estimates and increased its share value 60 percent since Goldman Sachs first assigned a Sell rating in 2016.

Now the firm is updating its outlook. 

The Rating

Goldman Sachs’ David Tamberrino upgraded Lear to Neutral and raised the six-month price target from $162 to $187.

The Thesis

Lear's fourth-quarter earnings beat and atypical, favorable inflection between 2018 and 2019 are encouraging, Tamberrino said in a Tuesday note.

“Overall, LEA’s continued solid execution, strength in new business wins and expansion into more secular growth areas (connectivity and vehicle electrification) of auto tech likely continue to drive benefits to bottom line EPS growth and FCF generation,” the analyst said. 

The previous bearish rating was based on expectations of revenue and margin stagnation driven by competition from Adient PLC ADNT, the market leader in vehicle seating.

Adient is now struggling in its turnaround and Lear's backlog growth indicates unexpected new business, Tamberrino said, adding that he expects free cash flow to grow with revenue in 2018. 

“However, we are not buyers here as we still believe the North America cycle is at a peak, that the favorable mix-shift to crossovers/SUVs slows and given NAFTA risk associated with LEA’s manufacturing footprint."

Price Action

At the time of publication, shares were trading down 0.19 percent at $194.91. 

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