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Bull of the Day

Lear Corporation (LEA - Snapshot Report) recently reported its 7th consecutive positive earnings surprise as it continues to benefit from a growing global automotive industry. Following its most recent beat, management raised its guidance for 2013, prompting a flurry of positive estimate revisions from analysts.

This sent the stock to a Zacks Rank #1 (Strong Buy).

Lear Corporation supplies seating and electrical distribution systems to the automotive industry. Approximately 76% of its sales are in the 'Seating' segment with the remaining 24% coming from its 'Electrical Power Management Systems' segment. The company was founded in 1917 and has a market cap of $5.7 billion.

Second Quarter Results

Lear delivered a solid 'beat & raise' quarter on July 26. The company reported adjusted earnings per share of $1.62, crushing the Zacks Consensus Estimate of $1.35. It was a 20% increase over the same quarter last year, due in part to a significantly lower share count.

Net sales rose 12% to $4.113 billion, ahead of the consensus of $3.904 billion. The Seating segment saw top-line growth of 10%, due in part to an acquisition. Sales in the Electrical Power Management Systems segment jumped 20%. Sales growth was strong in all geographic regions.

The gross profit margin declined from 8.6% to 8.2% of sales, but selling, general and administrative (SG&A) expenses declined from 3.2% to 3.1% of sales.

Increased Guidance

Following solid Q2 results, management revised its guidance higher for the remainder of 2013. The company now expects full year sales around $15.8 billion, up from its previous guidance of $15.0-$15.5 billion. It also raised its core operating earnings guidance by $25 million to a range of $750-$800 million.

This prompted analysts to revise their estimates significantly higher for both 2013 and 2014, sending the stock to a Zacks Rank #1 (Strong Buy) stock. The 2013 Zacks Consensus Estimate is now $5.62, up from $5.36 just 30 days ago. The 2014 consensus has moved from $6.68 to $7.01 over the same period.

Reasonable Valuation

Shares of Lear are up almost 8% since the Q2 earnings report, but there could be plenty more upside with shares trading at just 11x forward earnings, a discount to the industry median of 13x. Its price to book ratio of 2.3 is also below the industry multiple of 2.5.

The Bottom Line

With strong industry tailwinds, stellar earnings momentum and reasonable valuation, this automotive supplier offers attractive upside potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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