Autoliv has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 7.6% to $125.18 per share while the index has gained 10.8%.
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We’re swiping left on Autoliv for now. Here are three reasons you should be careful with ALV and a stock we’d rather own.
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Autoliv’s recent performance shows its demand has slowed as its annualized revenue growth of 2.7% over the last two years was below its five-year trend. We also note many other Automobile Manufacturing businesses have faced declining sales because of cyclical headwinds. While Autoliv grew slower than we’d like, it did do better than its peers.
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Autoliv’s revenue to rise by 4.5%. While this projection suggests its newer products and services will catalyze better top-line performance, it is still below average for the sector.
All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.
Autoliv has bad unit economics for an industrials business, signaling it operates in a competitive market. This is also because it’s an automobile manufacturer.
Automobile manufacturers have structurally lower profitability as they often break even on the initial sale of vehicles and instead make money on parts and servicing, which come many years later – this explains why new entrants such as Rivian, Lucid, and Nikola have negative gross margins. As you can see below, these dynamics culminated in an average 17.9% gross margin for Autoliv over the last five years.
Autoliv isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 12× forward P/E (or $125.18 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the most entrenched endpoint security platform on the market.