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If you are wondering whether Lear’s current share price still offers value, it helps to first look at how the stock has been behaving and what that might imply about expectations baked into the market price.
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The stock recently closed at US$117.09, with a 1 year return of 32.8%, but a 7 day return showing a 2.6% decline and a 30 day and year to date return showing a 1.3% decline. This can signal changing views on both growth potential and risk.
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Recent news coverage has focused on Lear in the context of the broader automobiles sector, including commentary around supplier positioning, cost structures and demand trends for auto components. This backdrop helps frame why the share price has risen over the past year while also seeing shorter term pullbacks.
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On our checks, Lear has a valuation score of 4 out of 6. This suggests some areas where the stock looks inexpensive and others where it looks more fully priced. Next we will walk through the main valuation approaches before finishing with a way to put all those methods into a single, clearer picture.
A Discounted Cash Flow, or DCF, model takes the cash Lear is expected to generate in the future and discounts those cash flows back into today’s dollars to estimate what the business might be worth right now.
For Lear, the model used is a 2 Stage Free Cash Flow to Equity approach. The latest twelve month free cash flow is about $715.1 million. Analysts provide explicit forecasts for the next few years. Beyond that, Simply Wall St extrapolates further out, with projected free cash flow of $559.7 million in 2035 based on the ten year path provided.
Using these cash flow projections and discounting them back, the model arrives at an estimated intrinsic value of about $140.41 per share. Compared with the recent share price of $117.09, the DCF output suggests Lear trades at roughly a 16.6% discount, which implies the stock looks undervalued on this cash flow view.
Result: UNDERVALUED
Our Discounted Cash Flow (DCF) analysis suggests Lear is undervalued by 16.6%. Track this in your watchlist or portfolio, or discover 887 more undervalued stocks based on cash flows.
For a profitable business like Lear, the P/E ratio is a useful way to see what you are paying for each dollar of earnings. Investors usually accept a higher P/E when they expect stronger growth and lower risk, and a lower P/E when they expect slower growth or see more risk.
Lear currently trades on a P/E of 13.7x. That sits below the Auto Components industry average P/E of about 23.6x and also below the peer group average of 28.8x, so the market is pricing Lear’s earnings at a lower level than many similar companies.
Simply Wall St’s Fair Ratio for Lear is 25.1x. This is a proprietary estimate of what Lear’s P/E might be given its earnings growth profile, industry, profit margins, market cap and key risks. Because it adjusts for these company specific factors, the Fair Ratio is intended to be more tailored than a simple comparison with peers or the broad industry averages. With the actual P/E of 13.7x sitting below the Fair Ratio of 25.1x, Lear appears undervalued on this earnings based approach.
Result: UNDERVALUED
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Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, where you combine your view of Lear’s story with the numbers by setting your own fair value, revenue, earnings and margin assumptions.
A Narrative links what you believe about the business, such as how Lear might compete, invest and manage costs, to a financial forecast and then to a fair value that you can compare with the current share price.
On Simply Wall St’s Community page, used by millions of investors, Narratives make this process accessible by giving you a simple framework to plug in your expectations, see the implied fair value, and consider whether Lear looks closer to a buy, a hold or a sell for you.
Because Narratives update automatically when new information arrives, such as earnings releases or news, you can see in real time how different investors end up with very different fair values for Lear based on their own assumptions, even when they are all looking at the same stock price.
Do you think there’s more to the story for Lear? Head over to our Community to see what others are saying!
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Companies discussed in this article include LEA.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com