Mad Money

Is Lear, Back From Bankruptcy, a Buy?

Investors who want to speculate on the economy’s recovery, Cramer said during Friday’s Mad Money, should consider buying Lear.

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Gaining Traction?

While many auto suppliers took on heavy debt loads to avoid going under, which has made their stocks untouchable, Lear used bankruptcy to its advantage. The company just emerged from Chapter 11 on Nov. 9, Cramer said, and it looks like the move was “perhaps the best thing that ever happened to Lear.”

This maker of seating systems and car electronics accomplished a lot during its four months in bankruptcy: It removed many fixed costs and created one of the strongest capital structures of any auto-parts company. The gross debt was reduced to $1 billion from $3.5 billion. And the three-year backlog jumped to $1.4 billion from $1 billion, a number that Cramer expects to grow now that the company’s in the clear

Also, Lear is expected to hold $1.5 billion in cash by year’s end, making it one of just three auto suppliers, along with Gentex and Magna International, to have net cash.

Lear ranks number two, behind Johnson Controls , in the auto-seating business, but there are few other sizable competitors about which to worry. That should keep prices stable. And while the recession shrunk the company’s profit margins to 0.9% in Q2 ’09 from 7% in 2007, they rebounded in the third quarter to 7.2%, despite an 18% sales decline.

If Lear can do so well in such a tough business environment, Cramer said, “Just imagine how much money this company is going to make when the economy recovers.”

Most of Lear’s revenues – 81% – come from seating, but electronics will deliver most of the company’s growth going forward. This division represents 60% of Lear’s backlog, which is smart considering that in 2012 40% of a vehicle is expected to come from electronics.

Cramer also likes Lear’s international diversification and the company’s history of managing expectations. He thinks the earnings estimates are too low, making them easy to beat. That, of course, boosts the share price.

Right now, Lear trades at an 18% discount based on cash flow versus its peers. Cramer said he thinks the stock deserves a premium. And it doesn’t matter that Lear is up 26% just in the 10 days since it emerged from bankruptcy.

“I think it can go much higher,” Cramer said.

Cramer's charitable trust owns Johnson Controls.

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