Auto Supplier Pair Trade: Buy Lear, Sell Adient

The auto industry has fallen on challenging times as raw materials face heavy trade barriers, component demand evolves to fit next-gen models and vehicle sales decline. In this environment, some suppliers are better positioned than others to emerge undented. 

The Analyst

Morgan Stanley analyst Armintas Sinkevicius upgraded Lear Corporation LEA from Equal-weight to Overweight and raised the price target from $209 to $214.

Adient PLC ADNT was downgraded from Equal-weight to Underweight with a price target cut from $50 to $43.

The Adient Thesis

Adient recently lowered guidance for its seat structures and mechanisms business to account for operational headwinds, which Sinkevicius expects will take years to address. (See the analyst's track record here.)

“While the company has acknowledged these operational challenges and is working through them, we see limited upside to numbers in the near term,” the analyst said in a Tuesday note. 

A cyclical downturn is seen to drive up Adient’s 2.3-turn leverage, according to Morgan Stanley. 

Given its challenges, Adient dropped from No. 6 to No. 8 on Morgan Stanley’s rankings for U.S. auto suppliers. The sell-side firm decreased the price target by $7 to reflect higher net debt and a lower multiple for equity income.

The Lear Thesis

Consensus estimates fell after Lear’s June investor day, when the company guided for underwhelming margins. Morgan Stanley expects the seat maker is being characteristically conservative and will pull off its standard beat.

“LEA is a company with a strong operational track record and history of ‘beat-and-raise quarters,’ with actual results exceeding management guidance,” Sinkevicius said. “ ... Furthermore, with the stock trading at a discount to historical levels, we believe there is upside to estimates and the multiple going forward.”

Lear rose from No. 5 to No. 4 in Morgan Stanley’s rankings. Its equity income prompted a $5 target increase.

Price Action

Lear shares were trading up 2.11 percent at $181.31 at the time of publication Tuesday morning, while Adient shares were falling 1.92 percent to $47.91. 

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Photo by Dwight Burdette/Wikimedia.