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Risk-Reward With Autoliv

- By Jonathan Poland

Regardless of where the transportation industry is headed, safety will always be a top concern. Autoliv Inc. (ALV) is the global leader in safety components and systems for the automotive industry, and with its stock trading just a few points off its year low, it looks like a bargain. Investors can take the 3% dividend and ride out the cylical markets to higher and higher long-term value from this stock.

Autoliv makes safety products like seat belts, air bags and steering wheels, which will continue to be installed in vehicles around the world. Even as modern society moves toward technology focused driverless cars, the need for passenger safety remains paramount to consumers and regulators.

In fact, Autoliv introduced side-impact air bags, owns around 7% of all automotive safety patents and spends about 5% of its revenue on research and development to stay out front. This has allowed the company to go from $6.4 billion in annual sales to over $10.3 billion during the last decade, while generating more than $4.2 billion in total profits. Over that same time, the company's market capitalization has risen from $1 billion to $7 billion.

In its latest quarter, Autoliv posted top-line results of $2.21 billion, and earnings climbed 50% to $2.20 per share with sales in North America and China increasing considerably. By 2020, the company is expected to earn north of $9 per share. If that comes into fruition, at its current price to earnings rate, the stock could easily rise to $126 per share.

To achieve this result, the company is focused on product launches, which have increased 72% year-over-year -- a trend that is likely to continue until the end of 2018, driving close to $500 million in organic sales growth through deals with Honda, Nissan and Jeep.

However, the last five years have been rocky to say the least with the stock bouncing between $60 and $100 a share. Now, despite overcapacity concerns leading to possible production cuts, industry cycles and overall economic uncertainty, it's off 30% from the June high of $114. Investors at this price are getting a great bargain.


More than 60% of Autoliv's work force is in low-cost countries, a move that has helped it keep capex costs low and in the long run will lead to a leaner cost structure, enabling the company to spend larger amounts on research and development while keeping its margins stable. It also plays into the trend of auto makers seeking a global common vehicle architecture.

Better still, consumers in emerging markets are becoming wealthier, a trend that will help Autoliv capitalize on growth from global demand for new passenger vehicles and the need for a greater level of safety.

Last, Autoliv is the low-cost and innovation leader, which makes switching to a competitor virtually a non-issue. Typically, auto manufacturers pay up for enhanced safety features. New innovations tend to debut on European and North American luxury vehicles, where average safety installs are in excess of $500 per vehicle. More importantly, changing a critical supplier like Autolive might cost the OEMs as much as $1 billion depending on the systems being replaced. This high switching cost is one reason Autoliv will be around for decades to come. generating double digit returns on investment capital.

Disclosure: I am not long/short Autoliv.

This article first appeared on GuruFocus.