Yet Another Way to Profit From Growing Auto Sales

ANUP is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Autoliv (NYSE: ALV), a manufacturer of automobile safety equipment, has a global client base and a reputation of being an innovative company. It delivered new products in eight out of 10 years since 2003. This company, in my opinion, has the potential to grow its profits much more rapidly than the auto industry as a whole during the coming years, as the auto industry is already on a roll. Plus, quite recently Scotia Bank released its global auto report, which puts the growth at 3.5%.

The company declared its 2Q13 results last month and it beat consensus estimates both on revenue and earnings. With booming automobile industry growth, which is projected to continue, it is clear that Autoliv should be a good buy but let’s look deeper before concluding.

A look at performance

Consolidated revenue increased 5.2% to approximately $2.2 billion, beating consensus estimates slightly. The increase in revenue was partly due to higher sales volumes, driven by more units produced and also due to the company gaining market share.

In North America, sales grew 8%. The year-over-year jump in revenue had the Chinese market making quite a contribution, as the concern for safety by leading Chinese car manufacturers takes precedence more than it used to. China was the star performer, achieving 16% organic sales growth for the quarter.

Even in Europe, organic sales advanced 6% as against estimates of 3%. The benefit accrued from the increase in production and higher demand from premium European car makers led to this out-performance.

On the earnings side, the company earned $1.44 per share, beating the consensus estimates by $0.05, which signified an increase of 8.3% over the year-ago quarter.

Way forward

The company is known for innovating, and the best way to evaluate the commitment to innovation is a look at R&D expenses. From 2003 to 2013 , the company has a brilliant track record of spending 7% to 8% of its revenue on R&D. No wonder that for the past eight-out-of-10 years, Autoliv has introduced at least one new product that attained the recognition of being unique in its class.

The mood is upbeat in the automobile industry and this trend is expected to continue. By 2015, it is expected that North American unit production will reach the levels of December 2000. In China, Ford was already on a roll in June and General Motors sold more in China than in the US.

Another factor that goes in favor of Autoliv is that it has high customer switching costs, which lets the company maintain revenue growth and display strong margin stability like it has done from 2009 through 2012, where gross margin stayed in 20% to 22% territory.

Automobiles in BRIC nations and emerging markets have safety-equipment content that’s far below what one finds in the US, Japan and Europe. With consumers becoming more aware of road safety and more demanding, companies like Autoliv are bound to gain.

Autoliv is focusing on expanding its presence in China, exemplified by the fact that it has launched more than 100 products in the past year and already has plans for two new plants in Changzhou and Changchun. All thrust is on increasing its market share in Chinese light-vehicle production from 35% in 2012 to 38% in 2015.

Management guided for 4% growth in organic sales for full-year 2013, with the increased demand for active safety features and China auto sales being the key growth drivers.

In addition, legislation and rating programs for vehicles are also getting better and more demanding. For example, EuroNCAP increased the Active Safety weighting from 10% to 20% in its assessments starting from 2004. If we look at all of this, Autoliv has a very bright future and has the capacity to grow even faster than the growth of the automobile industry as safety concerns in the emerging markets increase.

Look around

TRW Automotive (NYSE: TRW), Delphi Automotive (NYSE: DLPH) and a few privately held companies are competing with Autoliv for their stake in automobile safety component market share.

TRW also had a brilliant quarter, which saw consolidated revenue grow 6.5% to $4.5 billion and earnings grow 17% to $2.02 per share, beating consensus estimates on both fronts. The company quoted higher vehicle production in North America and China as the leading factors responsible for this impressive growth.

One matter of concern is larger exposure of TRW in European markets. Stated specifically, TRW has 42% of sales exposure in Europe as compared to 32% for Autoliv, and we all know how automobile market conditions are in Europe.

TRW has a lower spend on research and development, and this could be explained by relatively tighter conditions with regard to financials as compared to Autoliv.

Delphi is not just restricted to automotive safety solutions and products. It manufactures a whole gamut of automobile products and components like electrical and electronic, powertrain, safety, and thermal technology solutions for the automotive, commercial vehicle, and other market segments.

Delphi, just like TRW, has a high exposure to Europe (41% of its sales in fiscal 2012 came from the region), and weakness in Europe was bound to have an impact on its performance in the previous quarter. As a result, revenue slipped 17% to $4 billion and GAAP diluted earnings went down by 15% to $0.88 per share.

The only positive takeaway from the last reported quarter was that for the first time in its history, it generated positive operating cash flow and declared a regular quarterly cash dividend of $0.17 per share.

Conclusion

Autoliv is attractively valued at 6.7 times trailing-12 months EV/EBITDA and carries a decent 2.4% forward dividend yield. It has a good future and is a safe buy in my opinion.

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ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Autoliv. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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