Lear Shares Downgraded To Underweight Amid Weaker-Than-Expected US Auto Sales Forecast

Lear Corporation (NYSE: LEA) was downgraded by Morgan Stanley analyst Adam Jones from Equal Weight to Underweight, with a price target reduction of about 10 percent to $134.

The analyst’s 2017 EPS remained unchanged, but EPS estimates for 2018 through 2021 were increasingly decreased by 7 percent to 16 percent respectively.

“Lear has many attributes that we are fond of: a product portfolio that is relatively agnostic to powertrain, decent free cash flow generation, and a good acquisition track record,” said Jones.

Despite these positives, the company’s downsides were too large to justify an Equal-Weight rating.

2 Steep Downsides

The analyst significantly cut back his annual forecast for U.S. auto industry sales by 1 million–4 million units and expects to see the U.S. seasonally adjusted annual rate settle at 15 million units by 2020.

As a result of the U.S. SAAR reduction, Jones forecasts the company’s earnings to peak in 2017 and fall 20 percent by 2021.

Lear’s electrical business may perform especially poorly, limiting multiple expansion.

“While electrical content is set to rise in cars, we believe electrical margins will face higher development expenses, potential lost market share and greater competition from new entrants,” said Jones.

The analyst said Adient PLC (NYSE: ADNT) would be significantly better investment based on greater earnings growth and deleveraging potential.

At last check, shares of Lear were down 3.34 percent at $147.76.

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