Autoliv Will Ride High Again

By Ryan C. Fuhrmann | October 27, 2011 AAA

Autoliv (NYSE:ALV) bills itself as the global leader in automotive safety suppliers and estimates that its products save 25,000 lives annually. Despite the social benefits of its business model and steady growth trends, as demonstrated by double-digit sales growth during its third quarter, fears of a global economic slowdown sent its share price down by more than 30%.

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Third Quarter Recap
Sales jumped 15.9% to $2 billion: The sale of airbag safety products advanced 14.6% to $1.3 billion, or just over 65% of total sales. The other major category is seatbelt safety products, which increased 16.1% and weighed in at $659 million, or 33% of the total top line. The remaining 2% stemmed from active safety products, which saw an impressive jump of 77.7%. During the earnings conference call, management touted advanced recent driving safety product releases, including "collision warning, lane departure warning, automatic high beam switching, as well as traffic sign recognition."

Higher product costs resulted in a gross profit increase of only 10%, while a 20% jump in SG&A expenses and 17% increase in R&D costs, meant operating income grew a very modest 1.4% to $204.9 million. Costs included $5 million in legal spending related to an antitrust investigation into Autoliv, from the U.S. Justice Department and European Commission. Rivals, including TRW Automotive Holdings Corp. (NYSE:TRW) and Magna International, Inc. (NYSE:MGA), are also part of the investigations. Autoliv's only comment during the quarterly release was that it "can only say that they are still ongoing and that we therefore will not provide any additional information at this time." Higher interest and income tax expenses sent net income down 1.4% to $139.1 million, or $1.48 per diluted share. (To know more about the importance of R&D cost, read: Buying Into Corporate Research & Development (R&D).)

Outlook
Autoliv's sales did plummet 20% between 2008 and 2009 to $5.1 billion, but have recovered nicely and have the ability to grow in the double digits going forward. The auto supply market is also an extremely difficult industry to excel in. Over the past five years, rivals including American Axle & Manufacturing Holdings (NYSE:AXL) and Visteon Corp. (NYSE:VC) have seen their share prices plummet roughly 60 and 20%, respectively. In contrast, Autoliv's stock is up almost 10% over this timeframe.

For the full year, Autoliv currently projects sales growth of 15%, made up of organic growth of 9%; 2% from acquisitions and 5% from positive currency fluctuations. Analysts expect total sales north of $8.3 billion and earnings of $6.86 per share.

The Bottom Line
Antitrust concerns have certainly spooked investors, but the primary driver of Autoliv's recent share-price plummet has to do with worries over a slowing global economy. As its fortunes are driven by cyclical automotive demand, the worries are certainly warranted, but appear overblown at the current share price.

Emerging markets, where auto safety is in its infancy, will be a primary growth driver for Autoliv. A recent company presentation detailed estimated market share of 35% in China by next year and the ability to double sales in Brazil by 2014, thanks in good part to new airbag legislation. Investment appeal also lies in Autoliv's high free cash flow, minimal debt levels and a forward P/E of only about eight. (For additional reading, check out: Free Cash Flow: Free, But Not Always Easy. )

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