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Lear: Post bankruptcy Equity

 December 18, 2009 11:51 AM

Lear: Post bankruptcy Equity

This is a very interesting idea. Lear has just emerged from bankruptcy that it entered early in summer of 2009. The bankruptcy was voluntary.

Lear is a supplier of car seating and some electronics to car makers. Lear has a very dominant position in the seating market. However GM and Ford makes the bulk of its sales. In fact GM makes 23% of its sales while ford makes up 19%. Management is focused on diversifying this mix. They are focusing on sales into Asian countries where sales growth did not skip a beat in the last 2 years, unlike European and North American which sales plummeted.

What is good about the company is the following:
  1. Bankruptcy. Although it sounds bad but Lear has shed a lot of debt that was kept on its balance sheet after sales of some units to Wilbur Ross.  
  2. Management owns a lot of stock. In fact management owns 2.4% of shares on fully diluted basis upon exit from Ch. 11 and the CEO has a big chunk of it. I think management will do whatever it takes to increase business value.
  3. There will be a lot of forced selling and a lot of technical overhang that could pressure the stock in the next 12 months. the selling pressure will be from:
    1. CLO funds. Lear debt and loans was wildly held by CLOs. CLOs do not hold equity; their charter do not allow it.
    2. Preferred stock conversion. Right now preferred are in the money and the company can force its conversion.
    3. Warrants exercise also in the money.
    4. Warrants and preferreds conversion will cause 35% dilution.
  4.  The quick exist from bankruptcy limits lawyers and advisers fees.

What is not good about the ideas:
  1. The auto market has a lot of capacity still. even after all the bankruptcies not a single car maker disappeared, well only one Saturn but Saturn is made by GM so capacity is still there. We need to see some liquidation in the space.
  2. Margins are very thin right now below historical norm. This may change with more sales.
  3. GM and Ford make the bulk of its sales. Enough said.
  4. Economic risks of decline as so far recovery is shaky.
  5. Valuation is not cheap enough. I figure a good entry is between $48 and the high estimate of $55. If I am right about the selling overhang it will get there within a year, although it does not look like it as the stock price is on a tear lately.


Rich
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