Autoliv, Inc.
/ (ALV-NYSE)/ Equity Research / ALV | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 02/21/2011
Current Price (12/25/14) / $106.19
Target Price / $111.00
SUMMARY
Autolivreported third-quarter 2014 adjusted earnings of $1.25 per share, down 4.6% year over year. The earnings missed the Zacks Consensus Estimate of $1.40 per share. Consolidated revenues rose 4.2% year over year to $2.21 billion, missing the Zacks Consensus Estimate of $2.27 billion. The weakness was due to unfavorable vehicle mix and decline in vehicle production in China. Autoliv expects organic sales growth of about 5.5% and operating margin of around 9% in 2014. While the planned change in operating structure is expected to enhance growth and company benefits, backed by a strong balance sheet and innovative product launches, we are concerned about stiff competition and high dependence on a few customers. Moreover, low vehicle production in some regions could weigh on the company’s performance. As a result, we maintain a Neutral recommendation./ Equity Research / ALV | Page 1
SUMMARY DATA
52-Week High / $108.0352-Week Low / $86.27
One-Year Return (%) / 18.74
Beta / 1.66
Average Daily Volume (sh) / 472,917
Shares Outstanding (mil) / 91
Market Capitalization ($mil) / $9,663
Short Interest Ratio (days) / 6.13
Institutional Ownership (%) / 33
Insider Ownership (%) / 9
Annual Cash Dividend / $2.16
Dividend Yield (%) / 2.03
5-Yr. Historical Growth Rates
Sales (%) / 9.3
Earnings Per Share (%) / 12.7
Dividend (%) / 11.2
P/E using TTM EPS / 18.2
P/E using 2014 Estimate / 18.3
P/E using 2015 Estimate / 16.6
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Large-Blend
Industry / Auto/Truck-Orig
Zacks Industry Rank * / 85 out of 267
OVERVIEW
Autoliv Inc. (ALV), based in Stockholm, Sweden, is a holding company that operates through two principal subsidiaries: Autoliv AB (AAB) and Autoliv ASP (ASP). The company manufactures occupant restraint systems for automobiles and has a product portfolio consisting primarily of safety airbags, seat belts and steering wheels.
The Swedish corporation, AAB, develops, manufactures and supplies automotive safety systems to the automotive industry. These include seatbelts, seatbelt pretensioners, frontal airbags, side-impact airbags, steering wheels and seat sub-systems. The Indiana Corporation, ASP, designs, develops and manufactures airbag modules, inflators, airbag cushions, seatbelts and steering wheels.
Airbag products accounted for about 64.5% of revenues in the first nine months of 2014, while seatbelt products and active safety products contributed 30.4% and 5.1%, respectively. Most major automobile manufacturers in the world are served by Autoliv. It segregates results geographically into Europe, Americas, China, Japan, and the Rest of the World.
REASONS TO BUY
From Jan 1, 2015, Autoliv will change its reportable segments to Passive Safety and Electronics. The change in operating structure is expected to facilitate growth and help the company to effectively manage operations. It should also facilitate the implementation of Autoliv’s business strategies.
Autoliv has a strong cash position and balance sheet. This allows the company to actively pursue capital deployment strategies to boost shareholder value. As a result, in May 2014, the company increased its quarterly dividend by 4% to $0.54 per share. Autoliv spent $429 million to repurchase close to 4.3 million shares in the first nine months of 2014. These strategies help maintain the efficient capital structure of the company.
Autoliv expects organic sales growth of about 2% and projects operating margin to be around 9.5% in the fourth quarter of 2014, excluding capacity alignments and antitrust investigation costs. Autoliv also projects operating margin, excluding capacity alignments and antitrust investigation costs, of around 9% for full-year 2014.
Autoliv regularly launches innovative products to boost sales. The company has also received many awards for the same. In Dec 2014, the company announced that it will be supplying replacement airbag inflators for Honda Motor Company. The agreement is due to rising demand of inflators by Honda. In order to satisfy the increasing demand, Autoliv will expand the inflator production capacity in its existing manufacturing facilities. Deliveries will start almost after six months. In Apr 2014, Autoliv was announced as a winner of the 2014 Automotive News PACE Award for innovative “green” inflator, which ignites hydrogen, rather than pyrotechnic substances. This inflator is 20% lighter, 30% percent less costly and 99% smokeless, releasing only a few drops of pure water after deployment. Last year, Volvo Car Corporation granted Autoliv the ‘Excellence’ award for being the worldwide leader in automotive safety systems and developing the world’s first pedestrian protection airbag. Volvo V40/XC40, which is equipped with this airbag, received top ratings in the Euro NCAP crash testing evaluation.
REASONS TO SELL
Though Autoliv occupies a leading position in the market, it faces stiff competition in passive safety products from Takata Corporation and TRW Automotive Holdings Corp, which occupy one-fifth and one-sixth of the market, respectively. TRW has a strong market position in Europe and North America, while Takata has a strong market position in Japan and North America. Moreover, the market for active safety products is fragmented, leading to many competitors.
Autoliv reduced the organic sales growth guidance for full-year 2014 to 5.5% from the previous expectation of 6% improvement.
The company recorded slow growth in China in the third quarter due to a negative vehicle mix. The company expects this negative mix in China to continue in the fourth quarter. Moreover, the weakness in the Eurozone is resulting in operating inefficiencies related to underutilized capacity, forcing the company to undertake capacity alignment action. The company recorded a slower growth rate of light vehicle production (LVP) in the second half of 2014 due to uncertainties in the macro environment. The company further expects that the slower LVP growth rate will continue into the first half of 2015. This will hamper sales of Autoliv. The expected decline in vehicle production in Brazil in 2015 will also lower Autoliv’s sales in the nation.
Autoliv faces significant risk due to customer concentration. General Motors is the biggest customer of Autoliv and constituted 15% of total sales in 2013. Ford and Renault-Nissan are next in line, and each of them accounted for 11% of sales. The top 5 customers represent about 54% of sales and the top 10 represent 83% of sales. Thus, loss of any key customer could considerably affect the company’s earnings.
RECENT NEWS
Autoliv Misses Q3 Earnings on Weakness in China– Oct 23, 2014
Autoliv reported third-quarter 2014 adjusted earnings of $1.25 per share, missing the Zacks Consensus Estimate of $1.40 per share. Earnings decreased 4.6% from $1.31 per share in the third quarter of 2013.
Including costs for capacity alignment and antitrust matters, earnings per share amounted to $1.16 in the third quarter of 2014 compared with $1.29 in the same quarter of 2013.
Consolidated revenues rose 4.2% year over year to $2.21 billion, missing the Zacks Consensus Estimate of $2.27 billion. The weakness was due to unfavorable vehicle mix and decline in vehicle production in China.
Operating income declined 4.1% to $174.8 million (or 7.9% of sales) from $182.3 million (or 8.6% of sales) in the year-ago quarter. Excluding capacity alignment and antitrust investigation costs, operating margin stood at 8.5%, in line with the company’s guidance.
Segment Results
Sales of Airbag products (including steering wheels and passive safety electronics) rose 4% year over year to $1.42 billion on the back of high sales of inflatable curtains, knee airbags, steering wheels and safety electronics. Excluding negative currency effects, Airbag sales improved 4.4%.
Revenues from Seatbelt products improved 1% to $666 million, driven by higher sales in North America. Rising demand for more advanced and higher value added seatbelt systems globally boosted the segment’s revenues. However, model transitions and lower volumes for certain models in Asia partially marred the results. Excluding positive currency effects, organic sales improved 1.5%.
Sales of Active Safety products (automotive radar, night vision systems and vision camera with driver assist systems) surged 28.4% to $123.4 million year over year. Excluding positive currency effects, organic sales improved 29.2%. The increase can be attributed to strong sales of all products. Strong demand for radar and night vision products by Daimler AG for Mercedes as well as for radar products by Honda Motor Co., Ltd.’s Acura and Fiat S.p.A.’s Chrysler helped. There was also strong demand for vision products by BMW.
Financial Position
Autoliv had cash and cash equivalents of $1.85 billion as of Sep 30, 2014, up from $1.13 billion as of Sep 30, 2013. Long-term debt increased to $1.52 billion from $423.5 million as of Sep 30, 2013.
In the first nine months of 2014, Autoliv’s cash flow from operations decreased to $483 million from $539 million a year ago. Net capital expenditures increased to $326 million from $267 million in the year-ago period.
Share Buyback
Autoliv spent $239 million to repurchase about 2.3 million shares at an average price of $102.48 during the quarter.
Dividend Update
The company announced a quarterly dividend of $0.54 per share for the fourth quarter of 2014. The dividend was paid on Dec 4 to shareholders of record as of Nov 19, 2014.
Guidance
Autoliv expects organic sales growth of about 2% and projects adjusted operating margin to be around 9.5% in fourth-quarter 2014, excluding capacity alignments and antitrust investigation costs.
For full-year 2014, the company reduced the organic sales growth guidance to 5.5% from 6%. Autoliv also projects operating margin of around 9%, excluding capacity alignments and antitrust investigation costs.
Expenses related to the ongoing capacity alignment program are expected to be $40 million in 2014, while tax rate should be around 30%. Operating cash flows are anticipated to be at least $700 million and capital expenses are projected to be at the higher end of the guidance range of 4.5–5% of sales due to rising expenditure required to support growth plans.
VALUATION
Currently, shares of Autoliv are trading at 18.3x our 2014 EPS estimate of $5.79. The company’s current trailing 12-month earnings multiple is 18.2, compared with the 17.3 average for the peer group and 19.1 for the S&P 500. Over the last five years, shares of Autoliv have traded in a range of 7.0x to 48.0x trailing 12-month earnings. The stock is trading at a discount to the peer group, based on forward earnings estimates for 2014. The current P/E is at a 25% discount to the peer group for 2014. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the overall market. Our target price of $111.00, which is 19.2x our 2014 EPS estimate, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of ALV. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1139companies covered: Outperform- 15.8%, Neutral- 77.8%, Underperform – 6.1%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Analyst / Kamalika SinhaCopy Editor / Oindrila Ghoshal Dutta
Content Ed. / Sweta Goenka
Lead Analyst / Sweta Goenka
QCA / Anindya Barman
Reason for Update / Earnings
/ Equity Research / ALV | Page 1