Two important questions to ask before you buy Lear Corporation (NYSE:LEA) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, Lear is currently valued at US$8.8b. I’ve analysed below, the health and outlook of Lear’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
Is Lear generating enough cash?
Lear generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
The two ways to assess whether Lear’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Lear’s yield of 12.4% last year indicates its ability to produce cash well-above the market index, given the size of the company. This means investors are adequately rewarded for the risk they take on by overweighting Lear.
What’s the cash flow outlook for Lear?Can Lear improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, expected growth for Lear’s operating cash is negative. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. Below is a table of Lear’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year|
|Operating Cash Flow (OCF)||US$1.8b||US$1.6b||US$1.8b|
|OCF Growth Year-On-Year||-9.1%||8.7%|
|OCF Growth From Current Year||-1.1%|
Although Lear offers an above-average yield relative to the market index, its negative operating cash flow growth in the near-term is concerning, and makes us a cautious around the company’s future outlook. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Lear to get a more holistic view of the company by looking at:
- Valuation: What is LEA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LEA is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Lear’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
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