Autoliv’s ALV top line is likely to benefit from rising demand in automotive safety technology and growth in electric vehicles. Cost optimization initiatives also bode well. However, supply-chain bottlenecks, chip crisis and escalating investment expenses might clip margins.
Let’s delve deeper as to why Autoliv, currently carrying a Zacks Rank #3 (Hold), warrants a cautious stance right now.
Positive Growth Drivers
Autoliv is witnessing impressive growth in the automotive safety technology domain. The company is set to gain from rapid demand of front center airbags, knee airbags, seatbelt and battery cut-off switches. Moreover, upgrades in government regulations and crash test ratings, highly safety-focused societies, and opportunities coming from new vehicle interiors have led to an increase in the safety content per vehicle. Autoliv is also leveraging the popularity of electric vehicles and the exposure is set to open new growth avenues for the firm. Autoliv expects organic sales growth of 12-17% year over year in 2022.
Cost reduction efforts look to keep the negative impact from rising prices of raw materials and wages, at bay. The firm is also undertaking strategic initiatives like capacity alignments, footprint optimization, adjusting production and shortening work week hours. These have led to footprint and capacity alignment in Europe, moving overhead functions to best cost countries in Americas, reduction of headcount by 11% in 2021. Cost control efforts are to continue well into 2022 which may offer some respite from inflationary pressures.
Autoliv’s balance sheet strength and investor friendly moves bode well. The company’s liquidity, including cash and unused loan facilities, was $2 billion, at the end of March. Its time interest earned ratio of 12.12 compares favorably with the industry’s ratio of 6.5. Long-term debt totaled $1,647 million, as of Mar 31, 2022, decreasing 24% from Mar 31, 2021 levels. In November 2021, the company authorized a new share buyback program of up to $1.5 billion over the next three years. To investors’ delight, Autoliv hiked its fourth-quarter 2021 dividend to 64 cents, 3% higher than its previous payout.
Headwinds to Growth
The IHS Markit indicates that the first-quarter 2022 global LVP declined 4%. In second-quarter 2022, the global LVP is expected to have declined further, thereby impacting the demand and sale of Autoliv’s products. Markets with high safety content per vehicle were most impacted. As of 2021 end, inventory of new vehicles in the United States was 1 million units, the lowest level in 35 years. Vehicle registrations in Europe have not climbed up to the pre-pandemic levels amid shortage in parts, aggravated by the Russia-Ukraine war. These factors are likely to weigh on Autoliv’s sales volumes in second-quarter 2022.
Rising prices of raw materials is set to remain a major challenge. During the last reported quarter, high commodity costs hurt the firm’s operating margins by 5% or $110 million. The company expects substantial headwinds from raw materials in 2022. Operating margins are expected to be clipped by 6%. Apart from steel and non-ferrous metals (aluminum and magnesium), high prices of yarn, especially polyester and polyamide or nylon, will also have a significant impact in 2022. Autoliv’s electrification efforts entail high R&D costs and capex requirements to launch technologically advanced products. These, in turn, hurt the cash flow and hamper long-term prospects. In 2021, Autoliv generated FCF of $300 million, lower than $509 million in 2020, driven by the lower operating cash flow and higher capex.
Unfavorable forex also puts Autoliv at risk. In the last reported quarter, forex negatively impacted the operating profit by $50 million. For 2022, currency translation effects are assumed to be around negative 3%.
The company has downwardly revised its projections for few parameters, which is concerning. The company estimates an adjusted operating margin of 5.5-7% lower than the prior guidance of 9.5% as well as 8.3% recorded in 2021. Operating cash flow is envisioned in the band of $750-$850 million, down from the prior view of $950 million.
Key Picks
Better-ranked players in the auto space include BorgWarner BWA, Wabash National Corporation WNC and Standard Motor Products SMP, each carrying a Zacks Rank #2 (Buy), currently. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
BorgWarner has an expected earnings growth rate of 23% for 2023. The Zacks Consensus Estimate for current-year earnings has been revised 0.3% upward in the past 30 days.
BorgWarner’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters. BWA pulled off a trailing four-quarter earnings surprise of 33.1%, on average. The stock has declined 27.4% over the past year.
Wabash has an expected earnings growth rate of 239.3% for the current year. The Zacks Consensus Estimate for current-year earnings has been constant in the past 30 days.
Wabash’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters and missed in one. WNC pulled off a trailing four-quarter earnings surprise of 51.26%, on average. The stock has declined 43% in the past year.
Standard Motor has an expected earnings growth rate of 5.2% for the current year. The Zacks Consensus Estimate for current-year earnings has remained constant in the past 30 days.
Standard Motor’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters. SMP pulled off a trailing four-quarter earnings surprise of 40.34%, on average. The stock has risen 6.2% over the past year.
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