Cartenna Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 5.6% for the third quarter, underperforming its benchmark, the S&P 500 Index which returned 8.93% in the same quarter. You should check out Cartenna Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.
In the Q3 2020 Investor Letter, Cartenna Capital highlighted a few stocks and Lear Corp (NYSE:LEA) is one of them. Lear Corp (NYSE:LEA) manufactures automotive seating and automotive electrical systems. Year-to-date, Lear Corp (NYSE:LEA) stock gained 16.5% and on December 24th it had a closing price of $159.86. Here is what Cartenna Capital said:
“We have recently initiated a position in Lear Corporation (“LEA” of “Lear”). Lear represents a unique opportunity to benefit from tremendous cyclical upside in addition to option value from a hidden asset that could be worth more than 25% of the current market capitalization. As we will discuss below, we believe that Lear’s core operations are worth $200 per share today, and their Xevo connected car platform could offer a call option on another $30 per share. In total, we underwrite a price target of $230, representing more than 70% upside from current stock price levels of $130.
Lear is a leading global auto supplier with two core segments: i) best-in-class seating business (75% of revenue), and ii) automotive electronics business (E-Systems — 25% of revenue). Importantly, Lear is powertrain agnostic, and thus should survive and potentially thrive throughout the transition from internal combustion engine to a world of electric vehicles. The seating division is well equipped to recover from the recession with its “just-in-time” manufacturing offering that will drive efficiency and help margins return to pre-covid levels rapidly. Major launches with the Cadilac Escalade (N. America), BMW 4-Series (Europe) and the Audi E-Tron (Europe) should help propel market outgrowth in the coming year. The E-systems segment will benefit from secular trends and incremental focus on automobile electrical architectures. In conjunction with the top line tailwinds benefitting the E-Systems segment, operating profit margins should be able to expand from 3.5% in 2020 to 10%+ in 2022 on the back of restructuring a business with Ford, improving mix, and as Xevo turns profitable (previously a 150bps drag to segment margins).
Putting it all together, we believe Lear has the potential to earn $20 per share in 2022 and run-rate close to that number by summer 2021. Putting a still very low multiple of 10x PIE on the earnings potential, LEA’s core operations are worth about $200, or roughly 50% upside.
As mentioned above, Lear’s Xevo could represent an additional $30 per share of hidden value. Acquired for just $320mm in 2019, Xevo is an in-vehicle commerce and service platform that connects drivers with brands that they use and prefer. The software becomes tailored to the driver and makes it simple for him or her to locate, order and pay for items such as parking, food/beverage, and fuel with just a couple of touches on the center console screen. The value of the asset is in the data that is collected from millions of cars in the installed base, and how it can be monetized in several ways including i) advertising (Starbucks, McDonalds, etc); ii) OEM data collection (currently partnered with GM, Ford, Toyota, Hyundai, Fiat Chryler); and iii) fee for percentage of total purchase (parking, fuel, etc). Lear estimates that the tangible addressable market for Xevo will reach $5bln by year 2025. We estimate that the asset is in the early innings of its growth potential, having achieved revenue of around $100mm in 2019. Driven by further OEM partnerships and user adoption, we estimate that Xevo can achieve $200mm of revenue in 2021. As Lear discusses Xevo more in the coming year, we believe that the market will give significant value to this revenue stream. If we ascribe a multiple of 8-10x sales, it would imply value of $1.6-$2.0b1n. This equates to roughly $27-$35 per share for Xevo alone, providing additional upside of 20-25%.”
In Q3 2020, the number of bullish hedge fund positions on Lear Corp (NYSE:LEA) stock increased by about 7% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Lear’s growth potential. Our calculations showed that Lear Corp (NYSE:LEA) isn’t ranked among the 30 most popular stocks among hedge funds.
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Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.