ALV Stronger Than Predicted

Autoliv reported stronger than expected second-quarter earnings per share of $1.48, besting the Street consensus by $0.10 and $0.09 higher than the year-ago $1.39 EPS. Owing to an anemic European new car market, analysts were also expecting Autoliv to report flattish earnings for the quarter. The company’s like-for-like European revenue increased by 4% compared with a 4% decline in new car registrations. Management also raised its full-year revenue outlook to an increase of 4%, versus originally guiding to a range of 2% to 4%, and maintained its 9% operating margin guidance.

Autoliv has the ability to consistently innovate, high customer switching costs, and cost advantages. Autoliv’s competitive advantage from innovation was dramatically demonstrated during the quarter with a 70% revenue increase in the company’s burgeoning active safety technologies business. Unfortunately, the Street is well acquainted with Autoliv’s story and the 3- star-rated stock trades near the $85 fair value estimate. Autoliv’s surprisingly strong European revenue resulted from an unexpected increase in vehicle production and a favorable mix of vehicle models from customers like BMW, Jaguar Land Rover, and Mercedes.

The company also benefited from the strong sales of several Ford models, the Peugeot 2008, as well as Renault’s Clio. European revenue, partially offset by a small divestiture and including currency impact, rose by 5.3% to $709 million from $673 million last year. The company’s Chinese region reported revenue of $320 million, increasing 17.6% compared with the same period a year ago.

In the Americas, Autoliv posted a 7.9% revenue increase to $788 million. With active safety organic sales catapulting by more than 70% to $85 million during the quarter, our confidence was bolstered that Autoliv will achieve its active-safety-sales objective of $500 million in 2015. Second-quarter 2013 operating margin was 9.1%, down 30 basis points from 9.4% in the prior year, unexpectedly good relative to our original expectations for a year-over-year decline in European revenue. We have maintained a 9% operating margin assumption for the full year 2013, in line with management’s guidance and down by slightly more than 300 basis points from the annual peak achieved in 2010.

The lower operating margin assumption results from the negative effects of operational inefficiency on anemic European demand. Additionally, management disclosed that ongoing negotiations to further right-size European capacity have taken longer than it had originally expected. We have been skeptical of a recovery in Europe and have assumed that companies would find restructuring difficult given the strong social agenda in most European countries. The DCF forecast includes a modest increase in operating margin to 9.2% in 2014 on a nascent recovery in European demand in the second half of next year.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.