We are reiterating our Neutral recommendation on Autoliv Inc. (ALV). The company is benefiting from the growing importance of vehicle safety needs and continuous expansion into low-cost countries, which leads to stable market share. However, Autoliv is under pressure due to low production volume on the back of temporary plant closures in Europe and weak demand for Japanese-made vehicles in China.
Autoliv benefits from its expansion into the low-cost countries of Romania and China. The company has ample growth opportunities in these countries based on a rise in demand for automobile protection products. The company’s initiative to increase workforce by 67% will also support its expansion program. Expenditures in these countries are about 55% lower than high-cost countries.
In addition, the company expects to benefit from reduction in debt obligation, which in turn will increase operational flexibility. Total debt declined to $655.5 million as of September 30, 2012 from $702.0 million as of September 30, 2011 and debt-to-capitalization ratio declined to 15.1% as of September 30, 2012 from 17.6% a year ago.
However, Autoliv faces challenges from concentrated customer base. The top three customers, including Ford Motor Co. (F), Nissan Motor Co. (NSANY) and General Motors Company (GM), accounts for a roughly 20%, 15% and 10% of the company’s sales. The top-5 contributes about 60% of sales and the top 10 represent nearly 75% of sales.
Autoliv recorded a 16.9% decline in earnings per share to $1.23 in the third quarter of 2012 from $1.48 in the same quarter of prior year while net income dipped 15.1% to $117.5 million from $138.4 million a year ago. With this, the company has missed the Zacks Consensus Estimate by 19 cents per share.
The decline in profits was attributable to higher effective tax rate, negative currency translation effects, increase in shares outstanding, and capacity alignment and antitrust investigation costs.
Consolidated sales ebbed 3.5% to $1.9 billion due to lower sales in Airbag and Seatbelt segments. Excluding the adverse currency effects and the effect of a small divestiture, organic sales rose 2% during the quarter, which is narrower than the expected increase of 4%. The company has projected 0% to 2% growth in organic sales for the fourth quarter of 2012 and 4% growth for full year 2012.
Autoliv, based in Stockholm, Sweden, manufactures occupant restraint systems for automobiles and has a product portfolio consisting primarily of safety airbags, seat belts and steering wheels. Our long-term (more than 6 months) Neutral recommendation on the stock is backed by a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.
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