Autoliv: Cashing in on Safety

Firstly, it’s a scary market out there. Don’t get into new picks and dump more money unless you’re comfortable tying your money up for at least a year, perhaps several years. Secondly, I’ve been doing some research on “the next big growth area” or whatever you want to call it, and I’m finding that developing nations are now slowly mandating the installation of airbags in all vehicles. This means that key niche companies which focus on airbags and safety equipment and have heavy international exposure may benefit immensely. I found one such company - Autoliv (ALV).

Autoliv is a Swedish based American company with employees in 30 different countries. This pick is a growth play with a one to two year horizon. I took a look at their annual report (which is the first place you should look when analyzing stocks) - and their revenue is in solid shape, increasing 9% in the last year to $6.8 billion after modestly dropping the year prior. Their net income is flat after adjusting for one-time issues (but who doesn’t have one time issues nowadays?). They’re focusing on lowering costs and increasing profitability by switching over to low cost countries - here we go India.

The company generates over half of its revenue from Western Europe, but only a quarter from North America. So 22% is from the rest of the world, which doesn’t bode greatly for our developing nations theory. However the growth and revenue boost they saw in 2007 is directly from emerging markets. They’ve doubled their China based plants to nine in the last year and opened up plants in India and Korea as well.

The competitive arena is limited to three major players besides Autoliv - TRW Automotive (TRW) and Takata. TRW is a major player, but Autoliv seems to have been stealing market share from them. Takata enjoys a smaller share but is growing fast. The remainder of the market is extremely fragmented.

I’d like to look into the risks in more detail - but the prominent risk that stands out is if they can grow profitability in the near and long term. It’s a capital intensive business - and you’ll need thousands of full time resources focusing on this constantly.

Autoliv has been increasing forecasts and guidance lately (one of the few in 2008). The price point of $45 is down 20% for the last twelve months and off 30% since 52-week high of $65. they also raised their dividend to a 3.6% yield, and they’re 87% owned by institutions. They’ve been steadily buying back shares and regularly increasing dividends (dividends increasing at 25% CAGR for the last five years).

I’m going to continue digging before I add it to my portfolio - particularly I’ll have to try and find some sell side reports and find out what the experts think (”expert” is a relative term). But for now - it looks quite intriguing. If you find a stock you may be interested in - you should do a similar type of analysis. What do they do, how do they make money, where does it come from, how has their revenue and profit grown, what is the long term outlook on industry and company, who are key competitors, what are key threats, how expensive is the stock, etc.

Disclosure: Author holds a long position in ALV

Comments

[False Profit]

The auto industry downturn is obviously a negative, but the stock is at a single digit multiple of EPS and free cash flow. Stock buybacks, especially at this level, are tremendously accretive. I can see more than 50% upside to the stock.

[alikhan]

Remember they have a healthy dividend too. It might be worth it to buy and hang on for the auto industry ride while you're cashing in on dividends, meanwhile watching the company gross its market share.

[algo41]

They have steadily increased debt to finance the buybacks.