Estimating The Intrinsic Value Of Lear Corporation (NYSE:LEA)

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How far off is Lear Corporation (NYSE:LEA) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today’s value. I will use the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not February 2019 then I highly recommend you check out the latest calculation for Lear by following the link below.

See our latest analysis for Lear

The model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow estimate

2019

2020

2021

2022

2023

Levered FCF ($, Millions)

$912.72

$1.11k

$1.17k

$1.23k

$1.29k

Source

Analyst x5

Analyst x6

Est @ 5.26%

Est @ 5.26%

Est @ 5.26%

Present Value Discounted @ 13%

$807.73

$869.44

$809.89

$754.42

$702.74

Present Value of 5-year Cash Flow (PVCF)= US$3.9b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 13%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = US$1.3b × (1 + 2.7%) ÷ (13% – 2.7%) = US$13b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$13b ÷ ( 1 + 13%)5 = US$7.0b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$11b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of $175.56. Relative to the current share price of $153.59, the stock is about right, perhaps slightly undervalued at a 13% discount to what it is available for right now.

NYSE:LEA Intrinsic Value Export February 16th 19
NYSE:LEA Intrinsic Value Export February 16th 19

Important assumptions

I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Lear as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 13%, which is based on a levered beta of 1.412. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For LEA, there are three essential aspects you should look at:

  1. Financial Health: Does LEA have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Future Earnings: How does LEA’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of LEA? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.