New government regulations requiring higher safety standards from automotive manufacturers, such as the New Car Assessment Program (NCAP), should increase the use of active safety technology. Without a doubt, these measures will highly benefit safety auto parts manufacturers such as Autoliv Inc. (ALV, Financial). The company is the biggest safety parts supplier in the industry, producing airbags, seat belts and safety electronic devices. Its production is distributed internationally, and is strongly present in the North American, European, and Asian markets.
Above all, the firm’s narrow economic moat is the main reason Autoliv represents a great investment opportunity. The company showed great fourth quarter and full year 2013 results, with EPS of $1.70 and $5.82, respectively. In addition, the company is estimated to grow at an annual rate of 5% over the next five-year period.
Autoliv´s Encouraging Growth Potential
The company expects better sales for this year, partly generated by a new adaptable seat belt it has developed. This technology has been updated to meet the new NCAP crash test standards, and should allow the firm to achieve better safety ratings.
Autoliv leads the way in technological innovation, as indicated by the 6% expenditure of sales in research and development. Furthermore, 7% of all automotive safety patents are owned by the company. In addition, OEMs prefer suppliers with a global footprint like Autoliv, since they can provide them with components on a global basis.
The company´s financial performance should also be enhanced by the fact that 60% of Autoliv's output is produced in low-cost countries. This strategic move has proven to be very profitable as the company recorded a 9% hike in last year’s revenue, which reached $2.12 billion.
A Profitable Competitive Position Stemming from a Narrow Economic Moat
High customer switching costs, cost advantages and intangible assets are the sources of Autoliv´s narrow economic moat. Furthermore, the company also benefits from long standing and diversified customer ties, and a global footprint. Thus, Autoliv’s competitive market position is unquestionably one of its strengths.
Some of the company´s most important customers are Volvo Group (VOLVY, Financial), Fiat Group S.p.A (FIATY, Financial)Â and General Motors Co. (GM, Financial), among others. These customers have very high switching costs, since the company supplies them with a complete set of safety systems and its engineers are part of the early development process of new vehicle platforms. Hence, OEMs are very important customers for the auto parts supplier, and they would incur in prohibitively high switching cost if they were to change their supplier in the middle of a program.
A Great Investment Opportunity
I feel very optimistic about this stock, and believe strongly that this auto parts bull is a great investment opportunity. The company is projected to continue improving its financial performance, which will enhance shareholders' returns on investments. For example, the share repurchase program initiated by Autoliv, will see the repurchase up to 3.2 million shares.
In addition, the first quarter of 2014 recorded a 4% increase in annual dividend yield up to $0.52 per share. Furthermore, an ROE of 12.20% is tempting for new investors that seek a company with a profitable future ahead. Autoliv´s good financial performance is also shown by the company´s tendency to generate more cash income with a shrinking debt year after year. This could be responsible for the company´s fair operating margin of 8.65% in comparison to the industry's median of 5.30%. A profitable future for Autoliv can also be indicated by its ROC of 41.62%, which is incredibly high when compared to the industry average of 13.79%. To conclude, the growing tendency in revenue and net income is also one of the many reasons this stock is a great investment opportunity.
Disclosure: Damian Illia holds no position in any stocks mentioned.
