Although Lear Corporation LEA is well positioned in the tough macro environment, price concessions may continue to exert pressure and the progress at E-Systems may to too gradual, according to UBS.
The Analyst
UBS analyst Colin Langan downgraded the rating on Lear from Buy to Neutral while reducing the price target from $158 to $135.
The Thesis
Although the E-Systems business could improve margins going ahead, driving Lear’s overall margin expansion, the process is likely to be gradual, Langan said in the downgrade note.
He added that there is unlikely to be any meaningful improvement until mid-2020.
Lear has guided to E-Systems margin at mid-8%. Given the company’s history of above-average margin performance, there could be upside to this forecast.
Langan added, however, that the Lear’s fiscal 2019 guidance suggests that margins at E-Systems would be mid-7% in the back half of the year.
This is around 700 basis points below peak margins.
“We expect that until LEA is able to show margin expansion, investors will be sidelined,” the analyst wrote.
Although Lear is one of the best positioned in a recession scenario, given its strong balance sheet and free cash flows, recession risks cannot be ignored, Langan said. He added that the price concessions introduced by the company in the front half of 2019 could continue to weigh on performance.
Price Action
Shares of Lear had declined 0.28% to $126.05 at the time of publishing.
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