2024-01-06 00:19:00 ET
Summary
- ALV is a global leader in automotive safety systems, known for its production of airbags and seatbelts.
- ALV's historical financial performance has shown strong revenue growth and robust margins. For its 3Q23, revenue growth continues to be strong, and margins have expanded, driven by cost-saving initiatives.
- The strong growth in global vehicle sales and management's focus on profitability are expected to support ALV's future growth.
- Despite the positives, its share price lacks sufficient margin of safety. Therefore, I am recommending a hold rating.
Synopsis
Autoliv (ALV) is a global leader in automotive safety systems, well-known for its production of airbags, seatbelts, and other safety components for vehicles.
ALV's historical financials have shown strong revenue growth coupled with consistent margins. In addition, it actively reduced its debt levels over the years, which resulted in lower interest expenses. In 3Q23, revenue continued to show robust growth while margins expanded, driven by cost-saving initiatives.
Looking ahead, the strong anticipated growth in global vehicle sales, coupled with management's focus on growing profitability, is expected to bolster its growth outlook for the next few years. Despite ALV outperforming competitors, I have reduced ALV's P/E premium to account for the ongoing airbag recall situation. With a lack of margin in its share price, I am recommending a hold rating for ALV for now.
Historical Financial Analysis
Since 2019 , ALV's year-over-year revenue growth has shown recovery from the impact of the COVID pandemic, which severely impacted the automotive industry. In 2019, it declined by -1.5%, while in 2020 it was at its worst of -12.88%. However, in 2021 and 2022, the growth rate has turned positive at 10.51% and 7.44%, respectively.
Author's Chart
Overall, ALV's margins over the past four years were robust, although I do note that there was a slight contraction in gross profit margin [GPM] due to rising inflation. In 2019, GPM was 18.54%, while in 2022 it was 15.79%. As a result of contracting GPM combined with rising SG&A expenses, its operating income margin [OIM] also contracted. In 2019, OIM was 9.01%, while in 2022 it was 6.47%. Despite GPM and OPM contractions, its net income margin [NIM] remained robust. In 2019, it was 5.40%, and by 2022, it was 4.78%.
Overall, rising inflation is putting pressure on its margins, but I believe management did well managing it as the contractions are modest. In addition, it was facing volatile revenue growth during that period, and the ability to manage margins and keeping them robust is really an impressive feat on its own. Moving ahead, as inflation eases, I anticipate ALV's margins to remain strong for the quarters ahead.
Author's Chart
As its NIM is at single-digit rates, it is important to analyze its debt levels. Over the years, ALV's debt-to-equity [D/E] ratio has been steadily decreasing. In 2019, it was 106%, and by 2023, it had decreased to 73%. As a result of its deleveraging effort, its interest expense as a percentage of total revenue also decreased annually, which helped to bolster its NIM in the face of contracting GPM and OIM.
Author's Chart Author's Chart
Analysis of 3Q23 Earnings Results
ALV reported strong 3Q23 results. Revenue grew 13% year-over-year to ~$2.59 billion, up from the previous period's ~$2.3 billion. This strong growth was attributed to new products, better pricing, and favorable forex effects. Organic sales also grew strongly, at 11%, which is a strong indication that its core business is growing.
On the profitability side, 3Q23 operating income grew 36% to $232 million, up from the previous period's $171 million. The 3Q23 operating margin reported was 8.9%, a 1.5% expansion from the previous period's 7.4%. Operating margin expansion was driven by its strong sales combined with management's effective and aggressive cost reduction initiatives. Lastly, its 3Q23 net income also expanded to 5.16%, a 0.56% improvement from the previous period's 4.6%.
As a result of its strong revenue growth and margin expansion, EPS grew 30% year-over-year to $1.57. On an adjusted basis, adjusted EPS grew even higher at 35% year-over-year.
Author's Chart
Continued Structural Cost Reduction
ALV is actively addressing its cost reduction initiative as it moves towards its medium-term goals. In October , there were reductions in their headcounts in Japan, Sweden, the US, and China, as well as the closure of the Netherlands' office.
These cost-saving measures are estimated to reduce expenses by ~$ 35 million in 2024. For 2025, the savings are anticipated to be even higher at ~$65 million. When the initiative is fully executed, it will bump the savings up to ~$85 million. As of 2022, total operating expenses were ~$825 million. $85 million of cost savings represents ~10% of its total operating expenses, and this is significant in my view.
In addition, they have also planned to downsize the workforce in France by 20% . These initiatives are estimated to affect not only production overhead costs but also R&D and SG&A costs. These measures are estimated to result in savings of around $10 million in 2024, $20 million in 2025, and $25 million in 2026.
Their focus on global cost reduction will aid their operating leverage and profit margins. As mentioned above, ALV's margins are at single-digit rates. Therefore, these initiatives are expected to give its margins a significant boost.
US's Bid To Recall 52 Million Air Bag Inflators
The National Highway Traffic Safety Administration [NHTSA] has raised concerns about recalling 52 million airbag inflators because of the risks of explosion, causing the bursting of metal fragments.
Of the 52 million, 41 million is produced by ARC, ALV's competitor, while the remainder, 11 million, belongs to Delphi Automotive, which is part of ALV.
However, automakers and producers rebutted that the risk of such an incident occurring is extremely low. ARC and ALV have stated that there is insufficient backing to this claim, thus objecting to this recall.
To stay on the neutral side, we should not jump to conclusions about the outcome of the recall. If the recall occurs, the damage to ALV will not be as detrimental compared to ARC. In addition, management has stated that they are well prepared for such a scenario.
Strong Global Automotive Sales
Based on the following global vehicle sales forecast , it is anticipated to continue growing. In 2022, total vehicle sales were $1.76 billion, and they are projected to reach $2.08 billion in 2028. This represents a CAGR of ~2.82$ from 2022 to 2028. This strong growth in the global vehicle sales market will provide ALV with the tailwinds to grow its future revenue for the next six years.
ALV is a global leader when it comes to automotive safety systems such as airbags and seatbelts. As of 2022 , management stated that it commands ~43% of the total market share in the automotive safety segment. With its significant market share, ALV is well-positioned to grow its future revenue, particularly in light of the robust increase in global car sales.
In November 2023, China's passenger vehicle sales grew ~ 25% year-over-year, mainly driven by the ongoing price war. Looking at the chart, China's vehicle sales have been consistently increasing since the start of 2023. Therefore, China is a key market that will drive ALV's growth. As of 3Q23, China accounts for 21% of ALV's total sales, close behind Europe's 25%, and China is ranked third in ALV's sales region.
In 2024, the US is anticipated to generate the highest amount of vehicle sales revenue, estimated to be at ~$514 billion. Currently, the US accounts for 35% of ALV's total sales, and it is the largest segment for ALV. Therefore, the strong US vehicle sales will bolster ALV's growth outlook.
Reuters Autoliv's Investors Relations
Comparable Valuation Model
The four competitors listed in my comparable model operate in the same industry as ALV, which is automotive parts and equipment. Based on market size, ALV is 10% larger than the median. ALV has a market capitalization of ~$8.66 billion, while the median market capitalization is ~$7.89 billion.
In terms of forward revenue growth outlook, ALV dominates the competition. ALV's forward revenue growth rate is 10.28%, 29% higher than the median of 7.96%. Secondly, it also outperformed its competitors in terms of NIM TTM and GPM TTM. ALV's NIM TTM is 4.15%, higher than the median of 3.35%. In terms of GPM TTM, ALV reported 16.81% vs. the median of 15.87%.
As a result of its better growth outlook and profitability, ALV trades at a higher forward P/E ratio of 14.03x vs. the median forward P/E of 10.58x. This represents a premium of 33%. Given the ongoing airbag inflation recall situation, I believe ALV's P/E premium should be adjusted downward to 10%.
The market revenue estimate for ALV is anticipated to reach $10.42 billion in 2023 and $11.04 billion in 2024. In addition, the market estimates that ALV's 2023 EPS will be ~$7.51, and for 2024, it will be $9.85. These estimates are justified as the growth catalysts and ALV's financial strength, which I have discussed in depth earlier, support them.
By applying a P/E ratio of 11.64x to its 2024 EPS estimate, my price target for 2024 is $114.69, representing an upside potential of 10%. Despite ALV's strong growth outlook and anticipated margin expansion, the current ongoing airbag recall situation, coupled with a lack of margin of safety in its share price, has led me to recommend a hold rating as of now.
Author's Comparable Valuation Model Seeking Alpha Seeking Alpha
Risk
The downside risk of buying ALV is regarding the current US bid to recall 52 million airbag inflators. As of now, no one can predict the outcome of the recall. If it happens, 11 million inflators will be impacted, and this is going to have a short-term impact on ALV. As a result, the share price might be volatile if the recall were to proceed, as it might hurt market sentiments.
Conclusion
In conclusion, ALV's past four years of revenue have shown strong growth and recovery from the COVID-19 impact. Despite fluctuating revenue, it managed to maintain its margins, and this speaks volumes to management's expense management efficiency. When looking at its debt level, it has been consistently decreasing over the years. As a result, interest expense also decreased, which helped to bolster its NIM.
Its 3Q23 revenue continues to show strong growth, echoing the same sentiment as its historical performance. However, its margins for the quarter expanded, driven by cost-saving initiatives. As a result, its EPS grew at double-digit rates year-over-year.
Looking ahead, management has addressed and is taking active steps to strengthen its margins through cost-cutting initiatives such as headcount reduction and simplification of logistics. As such, I expect its margins to expand in the quarters ahead.
The strong growth in global automotive sales is also expected to give ALV the tailwind it needs to grow its future revenue. In addition, its commanding market share combined with its well-diversified sales region positions them well to capture sales in this growing market. Therefore, I expect its revenue to continue growing in the upcoming years.
Despite all these tailwinds and ALV outperforming its competitors in terms of growth outlook and profitability, its current share price lacks a sufficient margin of safety. On that note, I am recommending a hold rating for ALV for now.
For further details see:
Autoliv: Strong Growth Outlook But Limited Upside Potential