I was searching for stocks with an earnings yield at least double the 2.95% yield on five-year U.S. government bonds as of Oct. 8.
The threshold represents one of the screening criteria value investors would use on Oct. 9 to find bargains in the universe of publicly traded U.S. equities.
Such return incorporates not only the yield on a risk-free investment but also 2% inflation, and covers about three-tenths of an average annual return of about 12% on the S&P 500 index for the five years through Oct. 8, 2018.
The other seven-tenths of 12%, which equals 8.4%, we need to find elsewhere. Let’s say from an approximate 1.5% dividend yield and from at least a 35% stock appreciation within the next 52 weeks. Such appreciation from the share price at close Monday equals an annualized growth rate of 6.4%, which is about the remaining part of the missing average annual return on the S&P 500 index.
Lear Corp. (LEA, Financial) is a good match. The stock has an earnings yield of 13.6%, a dividend yield of 1.79%, and it is expected to appreciate 40% to a target share price of $203.312 within the next 12 months. Those values are according to the share price of $145.22 at close Monday.
The company manufactures and distributes automotive seating and electrical distribution systems. Lear Corp. is a global leader in the auto parts industry and is ranked No. 148 on the annual Fortune 500 list. The company is headquartered in Southfield, Michigan, and is present in 257 locations spread over 39 countries worldwide, employing about 165,000 people.
The company had international sales of $20.47 billion in 2017. The figure represents 10.3% growth from 2016. And over the last five years, the company has grown sales at an average rate of 6.3%. Total revenues are progressing since 2010 as is illustrated by the chart below from GuruFocus.
In 2017 the company generated net income of $1.313 billion or adjusted net earnings of $17 per diluted share. The total net profit margin was 6.4% of total revenues, above the industry median of 3.84%.Â
Looking ahead, total revenues are expected to grow 8.5% to $22.203 billion in 2018, nearly 5% to $23.295 billion in 2019 and 1.3% to $23.589 billion in 2020. Net earnings per share growth rates are expected to be 12.2% to $19.07 in 2018 and 7.8% to $20.55 in 2020. Analysts have also predicted that net earnings will grow 13.6%Â on average over the next five years.
Over the last 12 months to the second trimester of 2018, the company generated cash flow from operations of $1.69 billion and could pay about $744.11 million in dividends and to upgrade the business.
Lear Corp. is growing the business also through acquisitions. The last one happened in Feb. 2017 when the company acquired Grupo Antolin's automotive seating business for a little bit over $300 million paid in cash.
The company has paid dividends since 2011. The quarterly distribution increased from 12.5 cents to a current 70 cents per ordinary share. If held constant, this will result in a forward annual dividend of $2.80 per ordinary share, granting a yield of 1.96%.
The balance sheet is robust. As of the most recent quarter, Lear Corp. has $1.33 billion in cash on hand and securities, or about $20.32 per share. The total debt amounted to $1.96 billion for a total debt to equity ratio of 42.65% compared to an industry median of 51%. The trailing 12-month interest coverage ratio was 20.14. Thus, the company can easily handle the financial burden. Total assets were valued ay $12.28 billion and total liabilities were valued at $7.69 billion. The total stockholder equity of Lear Corp. was worth $4.3 billion as of June 30.
The share price was $145.22 at close Monday, having fallen 19.4% so far this year. The price represents a 4% gap from its 52-week low of $140.1 per share and more than 40% drop from the 52-week high of $206.36 per share. The market capitalization is approximately $9.5 billion on the New York Stock Exchange. The stock is a component of the Russell 1000 Index (RUI).
The share price is far below the Peter Lynch Earnings Line (P/E = 15) as shown by the below chart from GuruFocus.
The Peter Lynch chart powered by GuruFocus suggests that the stock is not expensive.
The price-book ratio is 2.22 versus an industry median of 1.45, and the price-sales ratio is 0.47 compared to an industry median of 0.78.
The recommendation rating for Lear Corp is 2.3 out of 5.
Disclosure: I have no positions in any security mentioned in this article.
