Autoliv: Safety Investing From Sweden – Autoliv, Inc. (NYSE:ALV)

In terms of automotive companies, when we include the supplier sector, Autoliv (ALV) is one of my largest holdings, coming in at about 1.5% of total portfolio value. Large portions of my position were bought at a perceived dip, which turned out to be only the beginning of a bigger one – meaning that my position in the company is currently somewhat in the red.

I am unconcerned in the long run, however. Autoliv is the largest company of its kind with a long, positive record and I believe that looking forward, little will change to justify rethinking my stance on this company.

Let me show you why that is in this article.

Autoliv – Safety First, Since 1953

The company was founded in Sweden during the early 50s as Auto Service AB (Changed in 1968) and early on became a crucial player in safety when it began production of the two-point seat belt. The company was then bought by Granges Weda, investors of the retractable seatbelt, and the new company was in turn acquired by Swedish giant Electrolux under the new name Electrolux Autoliv AB.

During the 80s and early 90s, the company grew mainly through M&As, and was listed on the Stockholm Stock Exchange under Autoliv AB. Its current state came in 1997, when Autoliv merged with Morton ASP to form the current Autoliv Inc.

The company has been through a number of structural shifts, but the biggest of late came in 2018, when the entire electronics business (passive safety electronics) was shifted off into the separate Veoneer Inc. (VNE)

And the resulting company is what we’re looking at today.

Autoliv’s Current Business

The company is active in products with the aim of saving lives. While not reportable segments as such, the following four segments represent the company’s current production rather well.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: Autoliv Nordic Equities Kapitalförvaltning, Stockholm, 2019)

It also doesn’t focus just on the cars but on pedestrian protection systems. The company’s products save lives each year, and according to the company’s own numbers/research, they save upward of 30,000 lives/year. There is, however, many reasons to do much more than this, and Autoliv’s aim is anything but finished.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV) (Source: Autoliv Nordic Equities Kapitalförvaltning, Stockholm, 2019)

Autoliv employs almost 67,000 people across the globe, with a daily production output of 1M units/day. The company is the largest name in the industry and boasts such things as:

  • 40% worldwide market share as of 2018.
  • >50% of global orders for the safety products that Autoliv manufactures were ordered at Autoliv
  • Inventor of the knee airbag
  • Inventor of the inflatable curtain
  • Operations in 27 countries, with sales across the entire globe.
  • Ranked #1 in every relevant product segment.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: Autoliv Nordic Equities Kapitalförvaltning, Stockholm, 2019)

The company’s customer base is global and contains basically every major car manufacturer in the world. Nor is the company particularly dependant on one geography – 31% in the Americas isn’t what I would consider a too large exposure given the market found there.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: Autoliv Nordic Equities Kapitalförvaltning, Stockholm, 2019)

The company manufactures the safety products for almost every second car you see on the streets. And the global car market is expected to grow, with significant growth to 2021 expected in what the company labels as “growth markets,” including Eastern Europe, China, South Asia, South America, and Middle East, while North America is actually expected to drop somewhat.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: Autoliv Nordic Equities Kapitalförvaltning, Stockholm, 2019)

Autoliv tracks its growth potential along lines such as model launches and key models, which in turn ramp up sales growth for Autoliv’s products. 2019 is expected to be a comparatively strong year, with the following models considered key growth drivers.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: Autoliv Nordic Equities Kapitalförvaltning, Stockholm, 2019)

Like any company involved in the automotive sector, Autoliv too is feeling the importance of the global electrification. For this company, it comes in the form of R&D into:

  • New Materials
  • New electrical solutions
  • Quieter products
  • Specific, battery-related solutions such as cut-off switches

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: FY18 Report)

In addition, the company is spending for the research into safety solutions for new, varied seating positions and more personalized restraint/safety systems, tailored not only for the traveler’s age but physical characteristics. Autoliv has also long been a strong proponent for external safety systems (for pedestrians, cyclists, etc.), and their R&D into this is ongoing.

So, in short – Autoliv researches, develops and manufactures safety equipment for a variety of automotive applications. They’ve done this for over 60 years, and given their market share, they do it well.

The company’s goals for 2019 are:

  • Continuing to execute on a strong order book and continuing demand
  • Improve product launch effectiveness
  • Improve productivity
  • Monitor the ongoing LV (Light Vehicle) market volatility
  • Overall, improve market position

Company Finances

Given its strong market position, it’s little surprise that Autoliv has a strong, overall balance sheet and financial position. Despite the company’s pressured market position in terms of share price/market cap, sales for 2018 grew compared to 2017, with a small drop in profits. Because of the Veoneer spin-off, certain key metrics are hard to compare, but the company had a strong 22% Return on Capital Employed and a 20% RoE for the year. A quick overview below.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: FY18 Report)

Market share growth during 2018 reached rarely-before seen record levels, with organic growth of 5% during the year despite an overall drop in the production of LVs. This comes to a market outperformance of 6%. The company’s cash flow remains solid, and the company’s order book remains filled even during times that the market considers volatile (and punishes automotive companies for).

The smaller profit margin (0.9% down) came in due to offsetting from increased launch-related costs due to higher launch activity, and some inefficiencies in the EU/China-related production and supply chain, this related to the changes in the LV production in China.

Sales in the company are concentrated. The top five Autoliv customers represent 50% of company sales, with the ten largest representing almost 80%. This well reflects the concentration in the automotive industry, where the five largest LV manufacturers produced almost 50% of the global LVP (Light vehicle production) and the ten largest at almost 75%.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: FY18 Report)

Company financial targets for 2018 were met. Despite the increase in debt of almost $1.25B, the company’s leverage ratio was at almost precisely 1.5X to EBITDA (Net debt + pension liabilities). In terms of credit rating, Autoliv’s A-rating is currently with a “negative outlook” from S&P due to Veoneer and perceived market softness going forward.

The company creates shareholder value through both dividend payouts and share buybacks. While dividend growth has been somewhat modest in comparison to true growth companies for the past few years, the company has been an active buyer of its own shares during times of undervaluation.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: FY18 Report)

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: FY18 Report)

The company dividend is paid out quarterly, once again making it a company headquartered in Sweden with a rare American dividend policy (not that odd perhaps, given its incorporation, but still). The dividend growth, while it can’t be compared to some companies growing at double-digit increases each year has nonetheless been around ~20% compared to 2014, making it more than acceptable in my book given the company’s market.

Recent Results

Due to the Veoneer spinoff and forward risk in the automotive market, especially given the LVM volatility, has put some pressure on the company stock, and it’s currently trading at levels below where it was during early 2018.

Despite this, company’s 1Q19 performance was in line with company expectations – and this is in the face of a weaker-than-expected LVP in all market regions, with a continuing weakness in China.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: 1Q19 Presentation)

The company’s organic sales growth continues to impress, with a ~2% increase (excluding costs for capacity alignments and antitrust matters), making it almost 9pp better than LVP (April 16th, 2019). Its goal for 2019 on executing a strong order book continues. The area where the company hasn’t yet delivered (though we haven’t even seen 2Q19 yet) is in the launch-side cost improvements. Any improvements here were minimal, and costs remained high.

The company is trying to adapt to a forward LVP weakness/headwind which may persist for years to come, while at the same time managing other product launches.

In terms of true headwinds affecting the company as of right now, and unrelated to the overall weakness of LVP/automotive, we have two.

  • Increased raw material prices, mainly Steel and Nylon
  • One-time effects from social unrest in Mexico, near one of the company’s production sites in Matamoros.

So, despite good sales performance, operating income dropped 32%, and EPS dropped down $0.55/share, once again showing the reason for the current stock price development.

Some key model launches during 1Q19 helped to offset the worst of developments.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: 1Q19 Presentation)

But overall, the market is seeing problems with the margins and operating income, combined with overall forward uncertainty for the entire LVM and automotive sector. The fact that the company is considered riskier than in 2018 is, as such, no big surprise.

As a result of poor performance, the company’s leverage ratio at the time of writing this article has also risen above company-accepted levels for the time being.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: 1Q19 Presentation)

Despite the current levels, however, the company expects leverage to be down by the end of the year, once again meeting goals.

So – recent results are characterized by overall light vehicle market weakness, where the company nonetheless manages to grow organically. However, there’s little question that this softness in the market may, or even will continue in the coming quarters. This brings us to risks.

Risks With Investing In Autoliv

I write about a few automotive stocks. Similar to them all is my current carefulness when it comes to investing in them due to a potential market drop both in 2019 and 2020. This applies to Autoliv as well.

While an amazing company, the automotive industry is inherently cyclical, and we’re seeing drops and volatility in Autoliv’s key markets. This is affecting the bottom line, and we’re seeing supply chain issues and margin compression, in addition to seasonal and one-time offsetting effects.

These risks need to be considered prior to an investment, as owning these stocks is tied to volatility – such as my holding, which nonetheless was bought at appealing valuation, but overall is down almost 8% despite this.

Being the largest player on the market, Autoliv also has to defend its position – but I don’t view the competition as a particularly relevant risk at this stage, as they too are suffering from similar effects from the market. Autoliv’s dominant market position acts as a buffer in times like this, provided the company continues to show operational excellence. In my view, they are doing just that.

Just like any international company, FX is also a risk for a company operating across all continents in the world.

Valuation

In terms of positives, company valuation is most certainly one of them.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: F.A.S.T Graphs)

ALV is currently being traded at ~10 times forward earnings, marking a discount of almost 2.4 P/E for normal, historical valuation.

Autoliv: Safety Investing From Sweden - Autoliv, Inc. (NYSE:ALV)

(Source: F.A.S.T Graphs)

Assuming that things barely improve from today’s valuation, which is an assumption we should make if we want to be conservative, you’d still be making a decent profit going forward 2-3 years.

If Autoliv returns to valuations of ~15 P/E, you’d be getting returns of over 20%, but this is an optimistic outlook given the current, and potential forward weakness of the LVM sector and the company’s current dependence on said sector.

The company is somewhat hard to forecast, with a decently high failure rate of 20% and some misses in the 3-9% range over the past few years. Care is recommended prior to investing in this sort of cyclical business in times such as these, as history has shown them to be prone to further drops.

This valuation forms the basis of my thesis.

Thesis

Despite volatility and forward risks, the market is putting an unjust, low valuation on the market leader in all things automotive safety. Such a discount should not be ignored, even if you choose not to act upon it.

At a yield of 2.9-3.6%, this isn’t a high yield business, but given its product lineup and long-term potential safety (the world will always need vehicular safety, automotive being one of the largest among them), I believe the yield to be more than “fair.”

I consider ALV one of my “safer” automotive stocks, and due to its NYSE-listing, it’s an easier case to sell to international investors than other European stocks. At current exposure, I’m carefully increasing my position further, but also waiting for a larger, potential drop.

The combination of a safety company serving virtually every car manufacturer on the planet with a discount valuation should interest anyone considering themselves a dividend investor. An investment into the company at this juncture has certain risks, of that there is no doubt, but the long-term potential reward here is significant, both in the form of generous dividends and in the form of share price appreciation once the market returns to more of a “normal” state in terms of LVM, or once the company cuts its current dependence on the segment.

And that is why, at a valuation of ~10 P/E, I consider ALV a “BUY.”

Thank you for reading.

Recommendation

At a valuation of P/E ~10, I consider Autoliv a “BUY” and have increased my position size somewhat. I’d be open for purchasing more if we see further drops, but I try to take care not to invest too much, given the overall high valuation of the current market. I recommend careful position sizing, and caution going forward. Investing more than 1% portfolio value at this time isn’t something I’d do.

Disclosure: I am/we are long ALV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment.