2023-09-27 23:02:17 ET
Summary
- Autoliv’s revenue growth is expected to improve, as the EV transition and greater regulation in recent years encourage greater demand for safety products.
- Beyond this, we believe technological development within the automotive industry, such as autonomous vehicles, which allow this to continue beyond the 2030s.
- Autoliv’s margins have contracted in recent years, with uncertainty as to whether these will return to their pre-pandemic levels.
- We are also hesitant about the sustainability of its current growth, owing to the weighting toward pricing.
- Autoliv’s valuation is reasonable, although it does not suggest a clear upside given the risks.
Investment thesis
Our current investment thesis is:
- Autoliv is a solid business for gaining exposure to the automotive industry, owing to its strong relationship with automakers and market-leading IP. This should ensure MSD/LSD growth consistently in the years to come, although in our view, is not sufficient. The EV transition and other technological developments in the sector have the potential to generate far higher returns, implying its peers will generate substantially higher returns.
- Autoliv is trading at a small discount to its historical average and a slightly bigger one relative to its peers. Both appear reasonable but do not suggest upside above and beyond the current level.
Company description
Autoliv Inc. ( ALV ) is a global leader in automotive safety systems, specializing in the development and manufacturing of passive and active safety technologies. The company is headquartered in Stockholm, Sweden, and operates worldwide, supplying major automakers with a wide range of safety products.
Share price
Autoliv’s share price performance has been underwhelming, gaining significantly less than the wider market during the last decade. This is a reflection of its mild financial performance and modest outlook long term.
Financial analysis
Presented above are Autoliv's financial results.
Revenue & Commercial Factors
Autoliv’s revenue has grown at a CAGR of 1% during the last decade, a disappointing achievement given the level of inflation. Autoliv has seen various periods of negative growth, while also conducting M&A and spinning-off a segment (Veoneer), implying some distortion to growth and potentially an inherent weakness in its target market.
Business Model
Autoliv is a global leader in automotive safety systems. It specializes in designing, manufacturing, and supplying a wide range of safety products, including seatbelts, airbags, steering wheels, radars, and camera systems, aimed at reducing traffic-related injuries and fatalities. The company’s strapline is “Saving More Lives”, with its whole strategic direction aimed at achieving this goal.
The company is known for both passive safety systems (e.g., seatbelts and airbags) and active safety systems (e.g., advanced driver-assistance systems or ADAS), which include technologies for collision avoidance, lane-keeping, and adaptive cruise control. The former is the “traditional” segment of the industry and Autoliv, with increasing investment (again within the industry and by Autoliv) in the latter, as the dynamics of the transportation industry change and there is a growing amount of technology usage.
Although vehicles, infrastructure, and roads are the safest they have ever been in recent memory, there are still a staggering number of accidents and broader dangers associated with vehicle usage. Autoliv’s solutions are underpinning this segment, seeking to continually develop products that will reduce the damage caused by this. The majority of its solutions are associated with protection, i.e. limiting the damage from an accident. However, the company is also investing in prevention, such as Crash Detection, High Complex Steering Wheels, etc.
Autoliv supplies its safety solutions to original equipment manufacturers (OEMs) for incorporation into new vehicles. Additionally, they offer aftermarket products and services, including replacement airbags and seatbelt repairs. Autoliv’s relationship with leading OEMs is critical to its success, as it allows for consistent demand in line with production, with long-standing relationships. Furthermore, it is a reflection of the company’s market positioning. If the leading global automakers are using Autoliv, it suggests that the company is a market leader in what it does.
Autoliv has a global footprint, serving automotive manufacturers worldwide. Their presence in various markets allows them to cater to diverse customer needs and regional regulations. Importantly, the company has good exposure to all key automotive industries, with almost equal revenue between each (Europe, Americas, Asia). This should ensure growth alongside production.
Autoliv has undergone significant corporate changes, including the spin-off of its electronics business into Veoneer. We are slightly disappointed to see limited M&A activity, particularly given its difficulty with achieving growth for much of the decade. Many within this industry have been active in supplementing organic growth with M&A.
Autoliv invests significantly in R&D to innovate and stay at the forefront of automotive safety technology. Although safety improvements will always be critical, development following the breakthrough creations of Seatbelts, etc. has been slow and incremental. Despite this, what we have seen a strong eagerness from Autoliv, pushing hard to discover new avenues for improvement across a range of sub-segments. We attribute this to Autoliv’s strong safety culture among its teams, with a view that more lives can always be saved. Its current R&D efforts are focused on developing products for autonomous vehicles and EVs.
Automotive Industry
The automotive safety industry is mature, with established players and well-developed products. When considered in conjunction with the gradual development of regulation and meaningful improvements, there are limited significant growth opportunities, as there's less room for disruptive innovation.
Autoliv faces competition in the automotive safety industry from companies such as ZF Friedrichshafen, Continental AG ( CTTAF ), Veoneer (now part of Magna International ( MGA )), and Takata (now part of Joyson Electronics), among others. Given the size of the industry and the various segments, strong competition and a mature industry do not wholly restrict growth, although they do restrict it.
Regulation is a key revenue driver, as the development of products to meet changing requirements is a minimum, with relationships with OEMs maintained through Autoliv’s ability to seamlessly have product changes ready in anticipation of key dates. Management heavily attributes the improvement in growth post-FY18 to an increase in the safety content per vehicle, alongside pricing.
As the following illustrates, there are many changes expected in the coming years that have the potential to incrementally improve growth (relative to its 10Y avg. and in line with near-term organic rate), although we are hesitant to suggest any of the below will be material.
Changes in consumer preferences, such as the shift toward SUVs, as well as the EV revolution are contributing to an uptick in demand in recent years. The EV transition in particular is a once-in-a-lifetime change in the industry, with many consumers being heavily encouraged to shift in the lead-up to regulatory bans globally on traditional ICE-powered vehicles. As the following shows, the business is consistently benefiting from new model launches.
While Autoliv offers advanced safety technologies, the adoption of these systems in vehicles can be slow due to factors like high costs, consumer skepticism, and regulatory challenges. This is still a technology that has immense potential but further progress is required before it can truly have a significant impact.
The key positives with Autoliv’s segment of the automotive industry are the resilience of demand and lack of volatility, although there are limited opportunities to achieve outsized growth due to the nature of safety products and the potential innovations possible. Organic growth has improved in recent years, which should continue into the early 2030s, in the lead-up to the regulatory bans.
Q2
Autoliv’s recent quarterly performances have been impressive, with a clear acceleration in growth. In the last 4 quarters, the company has achieved top-line growth of +24.6%, +10.2%, +17.4%, and +26.6%. In conjunction with this, margins also improved, although remained below their pre-pandemic levels.
The key takeaways from Q2 are:
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Revenue growth and Q2 margin improvement have been primarily driven by pricing action, with Autoliv still positioned to increase prices in response to inflationary pressures.
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The business is seeing reduced freight costs, as well as operational efficiencies come through, contributing to improving returns.
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Light Vehicle Production in both North America and Europe continues to be strong, with backlog implying growth is sustainable in the near term
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China is improving from a low base, although we suspect growth in the region will be mild given the change in subsidies for EVs.
Overall, this was a good quarter for the business, however, we are still slightly hesitant. Much of this is driven by price, which is clearly not sustainable. Further, the inability to materially progress toward its pre-pandemic levels is suggestive of a normalized level below their historical average.
Margins
Autoliv’s margins have trended down during the last decade, driven by a change in product mix (such as the sale of Veoneer), as well as significant inflationary pressures post-pandemic. Management has aggressively transitioned to a cost-focused strategy in the near term, seeking to cut costs and increase efficiency.
This has broadly been achieved, although the issue is that it has not been sufficient to offset the pricing pressures faced. As discussed above, Autoliv has been able to increase its prices to much success on a revenue basis, but it has not been sufficient. GPM sits at c.2% (Q2) below its FY19 level and S&A spending is 0.2%. Although these are small numbers, at the company’s scale it has contributed to a flat EBITDA on a $ basis.
Outlook
Presented above is Wall Street's consensus view on the coming 5 years.
Analysts are forecasting an improvement in Autoliv’s growth rate, with a CAGR of 7% into FY27F. In conjunction with this, margins are expected to incrementally increase into the middle of the decade, contributing to significant gains.
We consider the revenue forecasts to be punchy, particularly given the weighting toward price-driven revenue in recent years. We do believe an uptick in growth is sustainable, although beyond a MSD rate appears difficult to rationalize. Further, we struggle to see margins move beyond its historical average (13% on an EBITDA basis) during this period. The possibility is certainly there with the technological developments underway, but the runway for this technology feels further in the future.
Industry analysis
Presented above is a comparison of Autoliv's growth and profitability to the average of its industry, as defined by Seeking Alpha (26 companies).
Autoliv’s financial performance relative to its peers is respectable. The company has lacked in revenue growth in particular, and noticeably so, although has offset this somewhat by profitability growth. The lack of revenue growth is a reflection of the particular segment it specializes in, with its forward outperformance attributable to pricing and resilient demand.
Further, Autoliv’s margins are slightly above its peer group, although with a larger premium on a ROE basis. This is a reflection of its strong market positioning and scale, contributing to superior economics. Analysts are implying this will widen in the coming years.
Valuation
Autoliv is currently trading at 9x LTM EBITDA and 7x NTM EBITDA. This is broadly in line with its historical average, although is at a discount across other key metrics.
A discount to its historical average is warranted in our view, owing to the margin erosion experienced in recent years and the risks associated with a reversion to the mean. With growth slightly improving, we do think the discount should be small, which appears to be the case.
Further, Autoliv is currently trading at a discount to its peer group, although to a larger degree. We also believe this is warranted, primarily due to the mild long-term growth prospects. Yes, Autoliv has higher margins but this is not significantly so. Investors will likely generate higher gains over an extended period with a business that is producing more complex/important parts.
This said, we do not want to imply Autoliv’s valuation is completely unattractive. The company has been able to grow dividends at a 2% average rate, with occasional buybacks. At an FCF yield of 7.3% (above its historical average by a comfortable margin), there are certainly positives.
Final thoughts
Autoliv is a great business. The company has developed a strong array of products, underpinned by market-leading innovation and a strong culture of safety. This has allowed Autoliv to win and maintain a number of contracts, with sticky demand subsequently. Our concerns center around the growth potential of Autoliv, given the mild growth that's likely to follow. To be compensated for this, we would expect a moderate discount to peers, which is the case, but does not then leave sufficient upside to imply value.
For further details see:
Autoliv: Safety Means Resilient Demand