Filed Under:
Tickers in this Article: LEA, GM, F, JCI, TRW, GNTX, ARM
Hedge fund manager Avenue Capital invests in the debt and equity of distressed companies. It's not surprising then to find it held 2.5 million shares of Lear (NYSE:LEA) at the end of 2009, just weeks after the mid-cap car seat maker emerged from bankruptcy. One year later and Avenue Capital owns 4 million shares and is Lear's largest shareholder. Lear's stock gained 46% in 2010 and it looks like more of the same in 2011. Here are some reasons why.

IN PICTURES: 5 "New" Rules For Safe Investing

Getting out of Debt
Lear's fate was tied to customers like General Motors (NYSE:GM), who provided 23% of its business, as well as other auto manufacturers like Ford (NYSE:F) and Chrysler, and when tough times hit, it was only a matter of time before business as usual would end. Fortunately, the Michigan-based company was able to convert $3.6 billion in debt into equity as part of its prearranged bankruptcy reorganization. In addition, it was able to keep supplying its customers and thus it emerged from bankruptcy ready to tackle the new reality of the automotive industry.

Car Sales Improving
This past year was a glass half-full/half-empty kind of year. Those with a negative slant will point to the fact car sales in 2010 were the second worst in almost 30 years and not likely to return to previous norms. Those with a more optimistic view will point to 11.5 million new cars and trucks produced in the U.S. with the Big Three all doing better. I tend to sit somewhere in the middle. I do believe the worst is over and we can expect that in three to four years, business will look much as it did prior to the recession. If Lear continues to execute its business plan, Marc Lasry can expect to reap significant profits from his investment.

Business Plan
Part of Lear's future success is dependent on it penetrating foreign markets. Two-thirds of its revenues come from outside North America, with $2 billion of it from Brazil, Russia, India and China (BRIC). In just five years, it's grown revenues in the BRIC countries by 266%. In 2011, it expects these four countries to contribute 32.7% of unit sales, up from 30.5% in 2010. This year should see revenues approaching those prior to its bankruptcy, with core operating earnings (pretax less interest and other expenses) of $700 million, free cash flow around $400 million and adjusted fully diluted earnings of at least $9.20 per share. It expects net new business of $2.2 billion in the next three years, which should put its core operating earnings over the billion-dollar mark by 2013.

Lear and Auto Parts Peers

Company
EV
EV/EBITDA
Lear (NYSE:LEA)
$4.7B
5.7
Johnson Controls (NYSE:JCI)
$30.4B
12.7
TRW Automotive (NYSE:TRW)
$7.8B
4.8
Gentex (Nasdaq:GNTX)
$4.0B
18.1
ArvinMeritor (NYSE:ARM)
$2.8B
14.2
Valuation
We've seen a vastly improved business since Lear's bankruptcy and the stock price reflects this. However, that's in the past. Investors should focus on what happens in the future and how much to pay today for tomorrow's potential. Lear's enterprise value currently is $4.7 billion, which is 5.7 times EBITDA. The average of its four peers from the table above is 12.5. In addition, auto parts stocks are trading on average at 36.6 time's free cash flow. Based on Lear's 2011 outlook, I get a market cap of $14.6 billion. Even if you cut that in half, we're talking about a 30% bump in its stock price.

Bottom Line
Lear's stock is up almost 11% in 2011 and we're not even through January. If it delivers a couple of solid quarters in the first half, it'll blow through 30% by July. Frankly, if the economy continues to improve globally, I think a double in 2011 is more than doable. Enjoy the ride, Mr. Lasry. (For related reading, take a look at Why Hedge Funds Love Distressed Debt.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center