RBC Downgrades Lear, Says Margin Pressure To Continue Into 2020

Lear Corporation LEA pre-announced disappointing second-quarter results Tuesday and lowered its full-year guidance.

While the downward guidance revision was unsurprising, the extent to which it was lowered was — and it came due to margin pressure in the E-Systems segment, according to RBC Capital Markets.

The Analyst

Joseph Spak downgraded Lear from Outperform to Sector Perform and reduced the price target from $160 to $135.

The Thesis

Lear lowered its full-year guidance for net sales and core EBIT from $20.9-$21.7 billion to $19.8-$20.3 billion and from $1.6-$1.7 billion to $1.35-$1.45 billion, respectively.

While the company was expecting trends to improve in the back half of 2019, it now believes general macro and industry factors will continue exerting pressure on its business, Spak said in the Wednesday downgrade note. (See his track record here.) 

The guide-down was mainly due to margin pressure at the E-Systems segment, which is witnessing lower volume and a more challenging pricing environment, the analyst said. 

The revised guidance implies E-Systems margins of around 7% in the second half of 2019, he said.

Spak said he expects margins to contract further in 2020.

“While there might not be much further downside, we also don’t see compelling upside either, thus moving us to the sidelines.”

Sizable negative revisions to estimates could occur as the focus shifts to 2020, according to RBC.

Price Action

Lear shares were down 1.77% at $127.59 at the time of publication Wednesday. 

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