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Increasing Demand for Safety in Emerging Markets Will Be Essential for This Auto Parts Giant

December 10, 2013 | About:
Patricio Kehoe

Patricio Kehoe

7 followers
For those wishing to invest in the car industry without committing to a single automobile manufacturer, the auto parts sector presents interesting investment opportunities. Catering safety components to a series of companies, firms such as Autoliv Inc. (ALV) have experienced solid growth rates due to their wide customer base. In addition, the increase in demand for more safety features in automobiles, especially in emerging markets, has been largely beneficial for this industry giant.

As consumers become wealthier in developing nations, they tend to seek vehicles that offer more security for drivers and passengers alike. The huge boost in demand stemming from a wider middle class in China and India, are especially important in this sense. Yet not only ordinary consumers desire more safety features in their cars. Chinese and Indian auto makers are keen on acquiring the best safety products available, as they intend to expand their sales to the U.S. and Europe. Without new and efficient safety components, this will not be possible, hence I expect an increase in demand for these auto parts over the coming years.

Innovation and Relocation [/b]As a leading supplier of safety products for the automobile industry, Autoliv is bound to benefit from the increase in demand over the coming years. The sale of seat belts, airbags, side-impact airbags and electronics will surely increase, especially in emerging nations. And Autoliv is well prepared to meet the higher levels of demand. In anticipation of this trend, the company has allocated around 60% of its workforce in low-cost countries – compared to just 30% in 2002. This strategic move will surely allow the firm to pursue business opportunities more efficiently, due to a lower cost structure, and lower transportation costs.

Yet emerging nations are not Autoliv’s only target, and thus, large sums of money are invested in research and development. Staying ahead of the innovation curve is crucial for obtaining repeat business from large manufacturers which cater to the U.S. and European markets. Solid growth rates have already demonstrated Autoliv’s ability to innovate without sacrificing margins. The introduction of side-impact airbags, along with the ownership of 7% of all vehicle safety patents, are great examples of the company’s technological leadership.

[b]

Strong Returns at a Feasible Price
[/b]Innovation and reduction of costs has allowed Autoliv to not only stay ahead in the auto parts industry, but also generate healthy returns. Strong cash flow levels and rising revenue is indicative of the firm’s strong position in this market. A quick comparison to another industry giant, such as[b] Johnson Controls Inc (JCI), paints a clear picture of Autoliv’s success.

Johnson Controls offers shareholders an annual dividend yield of 1.5%, with EBITDA at 15.6% and returns on invested capital (ROIC) at 34.9%. These are definitely solid numbers, yet Autoliv is not far behind. Autoliv stocks offer a 2.2% annual dividend yield, and an EBITDA growth rate of 30.6%. In addition, a whopping 40% ROIC is very attractive. Also, considering that the stock is currently trading at 17 times its trailing earnings, entailing a small price premium of 10.3% relative to industry peers. Johnson Controls, on the other hand, is trading at 29.7 times its trailing earnings, representing a 92.8% price premium. Hence, Autoliv not only offers greater ROIC and a higher annual dividend yield, but is also trading at levels that make entry more feasible.

Bottom Line

Steve Cohen is an Autoliv bull, as are John Rogers and Jeremy Grantham, two investment gurus who recently bought into the firm. With share prices rising steadily since the beginning of the year, I too feel optimistic regarding this stock’s future performance.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 4.0/5 (5 votes)

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