In my first article on the stock, titled “Autoliv: Safety Investing From Sweden“, I posited a buying opportunity in Autoliv (ALV) at a yield of almost 3.7%. The undervaluation at the time was remarkable and could be said to be a result of general industry trends/cyclicals as well as trade issues between the world’s largest economies.
Since then, however, trade talks have resumed and the company has surged back up. At the time of writing of this article alone, the share is up 4% on the Swedish listing.
In this article, we’ll look at whether I can consider the company a good investment at this price point.
Few company-specific news per se, but appreciation is happening
The reason for my article and thesis update is simple.
In about a month, the stock has appreciated from nearly 600 SEK (Stockholm listing) to 774,00 SEK, representing an appreciation of nearly 29% during that short time, or an annualized return of ridiculous ~2,023%. In terms of timing of my original article, the stock has outperformed the S&P by over 10.75% since that time, and my position is in a firm “green” at this time, which is always nice.
Of course, this represents a rather explosive/volatile development – and at this time, it’s related to how well trade talks are going. If we look for potential company-specific news items which could result in such a development, we find very little.
The only item of note is a declaration with a Chinese SUV manufacturer to set up a JV in the form of a safety research lab, combining testing resources from both companies with a focus on the NA market (Source: Autoliv).
Other than that, there are no real items which should influence the share price from a company-specific perspective. Instead, what we’re seeing is a more general upturn due to trade-related positives here.
So given these limited news, and this singular item, how does this change the valuation proposition we’re seeing with Autoliv at this time?
Valuation update – Less value for your money
To say that Autoliv at this valuation isn’t a “BUY” would be going too far indeed. Let me show you.
(Source: F.A.S.T. Graphs)
While it is crucial to remember that the company operates, albeit indirectly, in the inherently cyclical automotive industry, its dominant market position earns it some stability usually not found in these types of companies. Today’s valuation is slowly creeping back up towards a 15 P/E ratio, but it’s not there yet. A ~12.7 times earnings is the price we’re seeing here. In terms of earnings, the company is still undervalued.
The same is true for earnings in relation to EBITDA as well as EV/EBITDA.
I believe it to be a good time to remind readers that Autoliv historically not only has outperformed the S&P 500, but also outperformed it by several percentages, and more than doubled the dividends received.
(Source: F.A.S.T. Graphs)
Consider also that this is from an A- rated company in the defensive business of safety, airbags and similar electronics. This isn’t your typical car company which risks negative earnings or dividend cuts during a recession (even if there was one during 2008 – albeit a small one), it’s a company which over time has grown dividends at over 15% per year. While the company’s dividend growth isn’t something that can be historically trusted, look between years 2013 and 2017 for instance, where shareholders were rewarded with a barely 3-5% per year, it’s long-term growth is nonetheless very impressive.
We can see a bit of a reason for the drop in the company’s share price (beyond tariffs and the like) if we look at Warren Buffett’s favorite metric – Owner earnings.
(Source: F.A.S.T. Graphs)
Owner earnings is a metric coined and detailed by Warren Buffett and defined as follows: Reported earnings plus depreciation, depletion, amortization and (certain) other non-cash charges, less the average annual amount of CapEx for plant and equipment. The criticism is that the more common cash flow numbers often add up the first part, but rarely subtract the average annual CapEx/annual investment of earnings.
So, due (among other things) to the Veoneer spin-off, as well as the company’s headwinds during late 2018 and the headwinds in operating income I mentioned during my previous article, the company’s numbers in terms of this metric dropped sharply. At current levels, the company is actually trading above what could be considered fair value in relation to Warren Buffett’s favorite metric.
However, it’s important to not only look at one valuation, such as P/E, peer comparison, or EBITDA, but instead we also try to look at a collective assessment of all. When doing so, the picture regarding Autoliv becomes a positive one, as the valuation still looks appealing. Not as good as when I wrote my initial article, but we can’t have everything.
Taking into consideration that Autoliv rarely (20% of the time on a 1Y basis, 10% margin of error) misses an earnings estimate, the picture isn’t all that bad. Approaching market-beating returns on a defensive car parts/safety manufacturer is, to me, a good enough reason to consider an investment.
There is however a counterpoint to be made if we look at the expected earnings drop off 12% during this fiscal. While I consider the long-term prospects for Autoliv to be excellent, I also believe that we may see further share price pressure once the next few quarterlies are released, and some of these negative expected earnings become a reality.
Such an occurrence would likely be followed by a drop in share price, representing, in turn, a better opportunity for investment.
Barring this, there’s little I see in terms of company valuation that speaks against investing in Autoliv at this time.
Due to a recently-induced high coming from improved trade talks, companies like Autoliv have seen a bit of a surge in the share price. Whether this gain is something that’s bound to continue or will come to an abrupt stop once (and if) things once turn negative is, of course, something we’ll see.
To my mind, there are three things to currently take into consideration when looking at Autoliv and considering an investment in the company.
First, the company is still undervalued. According to this, it may be a good investment, and faulting anyone for investing here isn’t something I’d do.
Secondly, however, this recent surge is a result of temporary improvements in volatile trade talks – not company-specific improvements. This means that if things turn sour, so may the company’s share price.
Third, if the second doesn’t occur, there’s still the small matter of the ’19 fiscal being expected to be in the negative and come in at about -12% reduction in EPS, something which may very well materialize given the company’s drop in operating earnings. Even if trade talks continue well, this may drop the company’s share price back down.
So, in conclusion, you should feel free to do your due diligence on Autoliv and invest at this time. I, however, will be waiting for better opportunities which I consider likely to occur due to points two and three mentioned here.
This simplified logic leads me to my decision to not invest in this particular juncture, but I nonetheless remain bullish on the stock, remain a LONG and consider the company a “BUY”, albeit a weak one, for those who are interested in the long-term investment here.
Thank you kindly for reading.
At this time, I consider Autoliv to be a “BUY” albeit a weak one due to still-present undervaluation. I do want to caution you, however, that I consider it likely for further short-term happenstances to once again pressure the share price, at which time it would be better to wait and invest once this has happened.
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.