Shares of auto parts supplier Lear (NYSE:LEA) gained 25.3% in January, according to data provided by S&P Global Market Intelligence, responding to a number of analyst upgrades suggesting that the stock's dramatic decline in 2018 was overdone.
Lear, a manufacturer of automotive seating and electronic systems, saw its shares decline by more than 30% in 2018 over concerns that the U.S. automotive market has peaked and worries that electronics suppliers will be forced to dramatically increase spending to develop technologies for hybrid and electric vehicles.
Analysts took a more optimistic tone after New Year's Day. The company's shares in early January were upgraded from a neutral rating to buy at two Wall Street shops, and received price target boosts at three others, as analysts concluded that investor worries about the industry were fully priced into the stock.
Later in the month, the company provided earnings and guidance that in no way implied the business is driving off a cliff. On Jan. 25, Lear reported earnings of $4.05 per share, which beat the $3.95 consensus, but said fourth-quarter revenue, at $4.94 billion, came in short of the $5.02 billion expectation.
Lear also ended the year with a $3.4 billion backlog, the largest in its history, and boasts a free cash flow yield of more than 10%, best among suppliers, suggesting it has the wherewithal to weather any coming downturn. In the meantime it has been returning that cash to shareholders, increasing its dividend by 40% in 2018 and repurchasing more than $700 million worth of shares during the year. Since 2011, the company has repurchased more than $4 billion in stock.
Perhaps most important for investors, Lear on its fourth-quarter call backed its full-year 2019 expectations for between $20.9 billion and $21.7 billion in revenue, within the range of what analysts are expecting. During a conference call with investors, management repeatedly urged calm in the face of potential global headwinds, insisting that Lear will manage through any volume slowdown.
CEO Raymond E. Scott said on the call:
Though the industry is facing significant macro challenges, we built this company to thrive in this kind of environment and really separate ourselves from our competition, and our efforts are paying off. We had the strongest backlog in our history, the most talented team in the industry, and an incredible reputation for operational excellence. We are continuing to make smart investments in innovation and technology. We are well positioned for growth while generating strong free cash flow and returns above our cost of capital. We have never been in a better competitive position or had more financial flexibility than we have today. And I'll tell you, I couldn't be more excited about the future of Lear Corporation.
Investor worries about the auto sector heading into 2019 are legitimate. But among auto suppliers, Lear appears well positioned to be a long-term survivor.