Luis Sanchez of Overlook Rock Asset Management presented his in-depth investment theses on Lear (NYSE: LEA) and Heidrick & Struggles (Nasdaq: HSII) at Best Ideas 2018.
Lear is a tier-one global auto supplier of seating and electrical systems. Lear’s seating business is the #2 supplier of seating by volume but is the leader in luxury and sports car seating (high-end market with superior unit economics) and is the lowest-cost global manufacturer of auto seating. Seating is a mature business that throws off significant cash flow. The electrical systems business is only 33% of earnings but is poised for significant secular growth due to exposure to car electrification and car connectivity. It is estimated the market for Lear’s E-Systems will double and triple over the next five and ten years. Lear is a good business in a cyclical industry. Investors can purchase the stock for only 11x free cash flow. Luis believes the cyclicality of the auto sector is more than priced in and that investors have a call option on the company’s exposure to the car electrification and connectivity mega-trends.
Heidrick & Struggles is an executive search provider and talent management consultant. Heidrick’s executive search business focuses on senior executive searches at large corporations. The search business has limited competition at the senior executive level and is insulated from technology disruption due to its extremely tailored product offering. The company’s consulting business represents less than 10% of sales but is positioned for cross-selling opportunities with executive search customers. Heidrick & Struggles is a better business than other publicly traded recruiting businesses but the stock trades at a discount to peers. The company appears poised to benefit from an increase in corporate spending over the next few years as well as a lower tax rate (current effective tax rate is 40+%). Investors can buy the stock for ~11x normalized free cash flow and benefit from continued earnings growth.
About the instructor:
Luis Sanchez is a Managing Partner at Overlook Rock Asset Management LLC, an investment firm which manages separate accounts for clients. Overlook Rock employs a quantamental investment approach which marries quantitative techniques with value investing principles.
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