Auto industry stocks are less of a long option and more of a short at the moment. Trade war noise is making investors jittery, there is a global decline in auto production, and disenfranchised UAW workers are striking to gain better wages and adequate healthcare coverage. It’s a perfect storm for original equipment manufacturers (OEMs) such as General Motors (GM -1.88%), but less so for one auto component supplier, Lear Corp. (LEA -2.19%).
Lear is standing out as a valid investment for the long haul. Here’s how the company is staying relatively stable amid all the chaos, cementing its place in the global supply chain, and why it’s a good pick for investors.
Component suppliers versus OEMs
Lear is a global automotive technology leader in seating and electrical and electronic systems, and it is showing tenacity compared to auto stocks. GM stock sank 4.25% to close at $37.21 on the first day of the UAW strike, whereas Lear stock showed an initial slight uptick on the same day but with a close at the same price as opening of around $124.
The current difficulties facing the auto industry are temporary. If Lear’s stock price drops in the short-term, it’s not disastrous for investors if Lear has the capital to sustain its position, which the company is confident it does.
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Stock buyback
In early February, the company announced a stock buyback of $1.5 billion with an authorization period through December 2021. This indicates that Lear considers its shares undervalued. There was also a dividend increase on the company's common stock of 7% from $0.70 per share to $0.75. Note to self, Lear’s dividends payouts have been steadily increasing since 2014.
But perhaps Lear’s biggest differentiator is its subsidiary Xevo, which it acquired in April 2019 for $320 million using debt financing. Xevo is an automotive software supplier that develops solutions for cloud, car, and mobile devices.
A genius partnership
Xevo's technology is combines e-commerce with artificial intelligence and is currently available in over 25 million vehicles located primarily in the U.S., with significant opportunity for expansion in North America, Asia, and Europe.
In early September, Xevo announced it would partner with Hyundai (HYMTF -0.76%) to deliver the Xevo digital platform to Hyundai vehicles in the U.S. and Europe. Xevo Market is a merchant-to-driver interaction platform bringing commerce and services replete with loyalty programs to drivers for on-the-go utility. For example, car owners with compatible vehicles can use an in-vehicle touchscreen and Hyundai’s mobile app to buy fuel, find parking, order pizza, and more (the pizza chain Domino’s is also in on the Xevo action and hopes to gain to-go market share as a participating merchant.)
Sustainable debt
It’s not ideal to use debt to acquire an asset, which is what Lear has done here, unless the asset is sure to provide financial gain quickly. Xevo certainly has that potential. Moreover, Lear had a debt-to-equity ratio of 0.55 as of June 2019, and the ratio has ranged from 0.47 to 0.67 since 2014. The ratio is steady, and the company is managing its debt well. Among competitors, the same ratio ranges from 0.06 to 1.14. An ideal D/E ratio is around one, when liabilities are roughly equal to equity.
The takeaway for investors then is that while Lear will see some effects of potential tariffs and declining auto production, its diversification into digital commerce will insulate it from the same fate as OEMs. Buying Xevo and establishing a channel for its technology with the Hyundai deal, even if it means an increase in debt, was a stroke of genius and one that makes Lear a pick for the OEM-averse.