Lear Analyst Cuts Price Target On Challenges At E-Systems Segment

Lear Corporation LEA has witnessed significant margin contraction and a decline in volumes at its E-Systems segment, according to Credit Suisse.

The automotive supplier reported a second-quarter adjusted EPS beat and sales miss Friday and lowered its full-year guidance. 

The Analyst

Dan Levy maintained a Neutral rating on Lear and reduced the price target from $155 to $130.

The Thesis

Margins at E-Systems have contracted sharply from the 14% recorded in recent years to around 8%, Levy said in a Monday note. (See his track record here.) 

A 70% decline in volumes came as a result of volume and mix issues; volumes at the China wiring harness business have declined significantly, the analyst said. 

Asia — which contributes around 20% of total revenue and was highly profitable — suffered significant margin contraction, he said. The region accounted for 260bp of the total E-Systems margin compression, Levy said. 

Lear lowered pricing in an attempt to diversify and boost growth. While this approach brought in new business, the endeavor was margin dilutive, the analyst said. 

The company expects to return to double-digit margins in the longer term.

This could be a lengthy process, Levy said, adding that there is limited opportunity for a near-term turnaround in the absence of an improving industry and the “spend required to support growth in electrification and connectivity.”

Credit Suisse reduced its 2020 EPS estimate from $19.98 to $16.23 to reflect lower revenue and margins.

Price Action

Lear shares were down 1.16% at $129.27 at the time of publication Monday. 

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