Autoliv (NYSE:ALV) is a company I’ve written about a few times in the past, notably also during the COVID-19 drop. Its fundamentals in terms of operations and safety are excellent – but it has a spotty record of management communication, dividend growth, and some other issues related to volatility which might scare investors off.
In this article, I’m going to provide an update on Autoliv as an investment and communicate when I would be investing more money in the business here.
Autoliv – An Update
Following 2021, the company seems to have a better upside than previously. 1Q22 is what we have to go on here as well as the 2021 results. As with all companies, Autoliv sees significant impacts from a number of things that bear mentioning.
First off, there’s considerable cost inflation across Autoliv’s entire value and product chain. Ukraine has only made the global supply chain worse, and the Chinese lockdown is affecting things as well. Autoliv customer visibility trends are low, and the company can’t plan as accurately for production at this time. Mainly, Chinese lockdowns are affecting the LVP component supply and combined with the Ukraine conflict, it’s affecting European LVP supplies as well.
Autoliv has sub-suppliers in Ukraine, but no operations of their own in the country. Still, Ukraine plants manufacture Wire Harnesses, Heat mats, and subassemblies for steering wheel switches – none of which currently work. The company is transferring production capacity to China, Macedonia, Germany, Hungary, and Mexico to try and catch some of the shortfalls.
The company also has one plant in Russia, which has around 200 employees that service the global OEM market. The company’s sales in Russia are less than 1% on a historical basis, but the company needs to manage its Russian operations and wind things down as needed.
Sales and income are down company-wide. Autoliv is one of the few companies I’ve reviewed recently where inflation in feedstock, markets, and macro are very much visible.
Sure, there are some key launches for the company that might weigh things up here over the next few months, but overall, things are fairly bad at this time for Autoliv. Even company sales are down, which is indicative given that most companies now are posting sales increases but margin/earnings pressure. In Autoliv, everything is down, with the exception that the company has resumed, and not yet cut its dividend again.
Looking at the income bridge, we see exactly where the company is experiencing issues.
This also shows you why I’m so positive about commodity companies going forward here. These businesses have significant pricing power that will, in my mind, offset any issues they face, while the further down the value chain/product chain we go towards end products, the more difficult it will be for the companies (with exceptions) to push price increases for non-essential goods.
Still, credit where credit is due.
Autoliv remains one of the more conservatively-managed businesses in terms of overall leverage and sticking within its long-term target of sub-1.6X long-term.
The name of the game for Autoliv is commodity pricing pressure. This is very unlikely to abate in the near term, and the company expects full impacts for the entire year of 2022.
So, the near-term for the company is challenged, to say the least. The company does have plans to mitigate some of these effects through a mix of improved procuring, supply and logistics planning, higher amounts of scenario analysis, hiring freezes, cost-saving initiatives, CapEx delays, strict inventory management, and so forth. In short, the company is pulling all levers it possibly can to improve the fundamental trends here.
The company now only forecasts a 2022 LVP growth of less than 5%, which is down nearly 2.2M units of Light vehicles versus the January 2022 forecast. The largest reduction is, of course, in Europe which is down 2M units. Autoliv sees the possibility of continued secondary impacts on the semi supply due to the Ukraine conflict. Outlook is negative for several of the company’s target areas.
Still, despite some of these expected headwinds are expected to slightly abate in the end of 2022. Given the company’s 2021 results, the company’s guidance for the full year includes significant sales increases, as well as improving margins and operating cash flow improvements. As long as LVP continues to grow, the company should continue growing its earnings as well, even if the effects of raw materials and cost inflation will continue to impact operations.
As mentioned, the company resumed its dividend. So what we have is a company now yielding a relatively impressive 3.54%, but we’re looking at a downward earnings trend on the back of significant cost pressures. This influences the short-term returns.
However, for the longer term, things are looking better. ALV is investment-grade credit rated, has incredibly low debt, and strong non-pandemic upside.
Autoliv – The valuation
Here are some of the positives, and the valuation for the company.
The company shows some volatility over time. I’ll also make it very clear that Autoliv has one of the worst forecast accuracies I’ve ever seen. FactSet analysts have an 85% negative miss ratio, even with a 10% margin of error. That means that statistically speaking, on a 10-year basis, you would have made more money by investing against what the analysts say. They have consistently, and provably been wrong to a degree higher than should be statistically possible.
That makes every forecast made for Autoliv, even conservative ones, somewhat uncertain. While the company does provide fundamentally important products, we need to make sure that our mid-to-long-term downside is protected here.
Provided that we assume a non-premium valuation for the company, the upside for Autoliv at a future 15X P/E, which is the highest potential upside I’m willing to consider, (even despite the significant premium for the company), is well over 30% p.a.
This comes to a triple-digit 3-year upside for investment in Autoliv, if there’s even any semblance of realistic upside such as this here. Now, the cost inflation will likely remain, so the company will have to increase prices while managing these headwinds.
S&P Global has the following considerations for Autoliv. The average price targets for the company are down more than 10% since late March and early 2022. 20 analysts give the company a range of $68-$113. The current price of $72/share is well below the analyst average of $89.3/share, which implies an upside of around 24%. However, more than half of those analysts have either a “HOLD” or a “SELL” rating on the company at this time, with 7 analysts at a “BUY” rating here.
So, even analyst conviction for Autoliv can be said to be relatively low despite what they consider to be a double-digit investment upside. Based on these truly terrible forecast accuracies, as well as the company’s own lackluster guidance, it seems premature to me to consider a 91% EPS growth in 2023 as a likely outcome – especially since these 2023E assumptions have seen over 20% downward adjustment in the last half year alone.
There are still a too many unknowns for this to be a comfortable investment for me compared to other companies on the market. That said, at a close to 15X P/E valuation, I do consider Autoliv to be a “BUY” – but at a much lower upside of $80/share.
What’s more, if you really want Autoliv, I would say that it’s a good time to consider the options available for the business.
If you’re willing to put money on the table here, there are double-digit annualized upsides for some of the put options available here. Here is one.
With this option in mind, I believe the common stock of Autoliv given its volatility and 2022E to be of more meager attraction at this point. Toward the end of the year, we’ll have a better clarity of where things might go, and at that point we could invest at a lower valuation with better clarity or better upside.
For now, I believe this to be the best choice for this company.
My thesis for Autoliv is as follows:
- Autoliv is one of the more solid automotive safety companies in the world, but unfortunately still has massive ties to light automotive vehicle production. This correlation means that 2022 is going to be a rocky year, which means the potential upside is uncertain.
- I find it to be a better choice to sell some put contracts on Autoliv for now as opposed to buying the common share.
- Still, valuation dictates Autoliv a “BUY” long-term, and I would pay below $80/share for the company.
Still, this company fulfills several of my investment criteria and does bear watching.
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company has realistic upside based on earnings growth or multiple expansion/reversion.
Thank you for reading.