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Why Shares of Lear Plunged In May

By Lou Whiteman - Jun 6, 2019 at 12:16PM

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Trade wars and slowdown talk hits the auto-parts sector.

What happened

Shares of Lear Corp. (LEA -0.16%) fell 16.8% in May, according to data provided by S&P Global Market Intelligence, as the company got caught up in concerns about slowing automotive demand and the impact trade wars and tariffs could have on auto suppliers.

So what

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 had peaked and amid worries that electronics suppliers would be forced to dramatically increase spending to develop technologies for hybrid and electric vehicles.

LEA Chart

LEA data by YCharts

The shares have been on a roller coaster in 2019, up big in January on hopes that the 2018 decline was overdone, but down in March after a new round of downgrades. The recent pressure is still tied to questions about demand, as well as to concerns that the U.S. would impose tariffs on China and Mexico that could dramatically increase costs in the auto supply chain.

An automotive seat on the assembly line.

Image source: Lear Corp.

Lear was downgraded to in line from outperform mid-month by Evercore ISI analyst Chris McNally ahead of what the analyst called a "seasonally dangerous" summer. McNally is worried that cyclical and structural headwinds will push shares lower over the months to come, leading to potential additional downside.

Now what

Lear shares have recovered some of what was lost in May during the opening trading sessions of June, gaining 5.5% though June 5. The change in sentiment coincides with optimistic talk out of Mexico that the tariffs can be avoided.

The takeaway for investors is that this is a volatile time to be invested in automakers and their suppliers, and that turbulence is unlikely to settle anytime soon. Lear has the assets to play an important role in the continued electrification of the auto industry, with CEO Raymond E. Scott on an April call with investors saying, "I'm very optimistic about Lear's future."

Investors can do well over the long haul by owning Lear. But be warned: The next few quarters could be a rough ride.

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