Marcato Capital Management Takes 5% Stake In Lear

Peers for Lear include Johnson Controls, Inc. (NYSE:JCI), Delphi Automotive PLC (NYSE:DLPH), and Magna International Inc. (NYSE:MGA). Forward earnings multiples for these companies tend to be in the 9-10 range, even with where Lear trades. Johnson and Delphi each reported double-digit percentage declines in net income in their most recent quarter compared to the same period in 2011, with Delphi’s earnings in particular being down sharply. Lear might therefore be considered a safer investment than these two companies. In the third quarter of 2012 Magna experienced similar circumstances to what Lear has reported: a moderate increase in sales, and an abnormally high growth rate of net income. It may be worth further research to see if its improved bottom line is more sustainable.

We’d consider Lear’s results for Q4 to be very strong news, even though the growth rate of pretax income should slow as long as revenue numbers are only modestly higher. Certainly the valuation is attractive at 11 times earnings estimates for this year. Of course auto related companies are generally cheap and it may be worth evaluating the automakers (such as GM and its competitors as well as Lear should depend on a stable auto market to continue its current sales growth.

Disclosure: I own no shares of any stocks mentioned in this article.