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Lear (LEA) Prepares to File for Bankruptcy

 Jun 25, 2009 11:00 PM UTC
Symbol Sentiment Start Return Closed
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LEA n/a
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Graphic_arrow1 Via Fund my Mutual Fund:  

As we said a month ago in [Jun 4, 2009: Detroit's Woes Wound an Army of Suppliers]

I think many people do not understand the daisy chain that is the automotive industry - there are countless suppliers of various size. They have been in a "right sizing" for a decade now, decimating the ranks (we've lost about half of them as we offshore) but there are still literally thousands out there. Lost in the "headline news" of the week (green shoots mind you) was the bankruptcy of Visteon (yes last week) - which was spun off of Ford much like Delphi (in bankruptcy since 2005) was spun off of General Motors.

Metaldyne is another supplier that went bankrupt last week (a smaller supplier) and I expect a bevy more to go this summer and fall. So while I expect (government reported) unemployment to level off and even improve from the dramatic (twice in a lifetime) levels we have seen, we have a slew of folk that will be joining the ranks from this industry and I think it is being understated.

But now we'll see some good sized firms go....


Of course that did not stop speculators from running into auto suppliers a week later (who needs fundamentals when we can drive a stock up 50%?) [Jun 10, 2009: Guess the Federal Bailout, Win Money - Today's Sector: Auto Supplier's Lear (LEA) +50%, American Axle (AXL) +30% and Dana (DAN) +20%]

The only irony in watching these stocks soar is knowing people in the supplier industry and these companies themselves and realizing what shape they are in, while their stocks surge.

No matter what shape the companies are in today, as with Sequenom (SQNM) yesterday all that matters is a technical intraday breakout or a huge volume spike, and away we go... daytraders pile in. Today's winners are Lear (LEA) +50%, American Axle (AXL) +30% and Dana (DAN) +20%.


Who knows maybe Lear will spike tomorrow on the bankruptcy filing leak! Why not? Stocks are not associated with underlying fundamentals anymore, they are just 3 and 4 letter symbols to be traded in video game manner by institutional computers and retail home gamers.

These are not tiny companies, Visteon went a few weeks ago [Ford's largest supplier] (30,000 employees), and Lear with 80,000 employees. Hopefully only 10-20K need to go from Lear - wait, doesn't Walmart (WMT) need to hire 20,000 this year? Perfect - 2 birds, 1 stone. Local papers reporting the Obama team is not accepting pleas for supplier handouts because they are not banks. Err, Freudian slip. The newspaper reports the belief is the auto supply chain needs to be cut in half. Which, if American consumers are going to be saving 8-9% of their income the next half decade is probably quite true. If so, we should see a good 2000 companies of various size go under. To go along with each of these car dealerships being tossed aboard (on average 53 employees) - also a necessity considering Americans are trying the whole "saving" thing.

I'm not worried about the employment situation myself; I know in the birth / death model of the government monthly employment report many of these people will be finding jobs in "companies too small too be counted in the survey". Or in the smart phone industry. Further, as people exhaust their unemployment benefits they will drop off the continuing claims and the market can cheer continuing claims going down as another sign of green shoots. Prosperity continues across the industrial heartland. Mmmm... I can see green shoots for miles under the sand.


Thankfully this Lear is not a bank or we'd have an all night vigil waiting to hear about how much US taxpayer money would be handed out in the morning (or this weekend - Sunday night before Asian markets open; ah memories of 2008!) because Lear is "too big to fail". Clears up some TV time otherwise spent glued to CNBC tonight or Sunday night watching oligarchs walking into buildings snickering how the US taxpayer is there for them.

There is one happy big fish investor who must be thanking the stars his tender did not work out.
  • Lear had been the target of billionaire activist investor Carl Icahn, who had offered nearly $3 billion to buy the auto supplier two years ago.

Via WSJ
  • Lear Corp., the world's second largest auto-seat maker, is preparing to file for bankruptcy as soon as next week, according to people familiar with the matter. The Southfield, Mich.-based company has been trying to negotiate an out-of-court deal with lenders, but lawyers representing the parts maker are "prepared" to put the company in bankruptcy court, one of these people said.
  • Last year the Southfield, Mich.-based company posted revenues of $13.6 billion.
  • Lear has been in talks with banks in recent days for so-called debtor-in-possession loans, the funding companies typically use to finance their stays in bankruptcy court, people familiar with the matter said. The size of the loan couldn't be learned.
  • Lear swung to a first-quarter loss of $264.8 million for as sales fell 44%. The company has reported one annual profit in its last four fiscal years.
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