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Autoliv, Inc.
Last Updated: 31 Jul 2024
NYSE: ALV
GICS Sector: Consumer Discretionary
Sub-industry: Auto Parts
Management
CEO: Mikael Bratt
Tenure: 6.1 years
Mikael Bratt has been the President and Chief Executive Officer of Autoliv, Inc., since Jun 2018. Before joining Autoliv, Bratt spent nearly three decades at the Volvo Group, culminating in his role as Executive Vice President of Group Trucks Operations. His extensive financial background includes serving as Chief Financial Officer for both Volvo Group and Volvo AB.
Bratt's leadership has driven significant growth and innovation at Autoliv. Under his guidance, the company has forged strategic partnerships to advance safety technology, including autonomous driving and advanced driver-assistance systems. Autoliv's manufacturing footprint has expanded globally, ensuring the company can meet surging demand while maintaining high product quality.
Furthermore, Bratt has spearheaded efforts to increase Autoliv's market presence in key regions, solidifying relationships with major automakers. The company has made substantial strides in developing autonomous driving and ADAS technologies, positioning itself as a leader in automotive safety innovation.
Let us now analyze the CEO’s compensation.
The total compensation refers to the sum of all forms of payments and benefits received by the CEO per year. This can include salary, bonus, stock options, and other perks.
From the graph above, the CEO’s compensation has been inconsistent with the company performance over the past year. This can generally be a red flag.
High pay without performance metrics tied to it raises questions about whether the CEO is being held accountable for their decisions. If the company does poorly, but the CEO gets a big bonus anyway, it can be seen as a reward for failure. This can discourage investors from putting their money in a company where leadership seems unaccountable.
Looking broadly at Autoliv, Inc.’s management team, it has an average tenure of 4.1 years. It is considered experienced.
Business Overview
Autoliv, a Delaware corporation headquartered in Stockholm, Sweden, serves as a holding company for its primary subsidiaries, Autoliv AB and Autoliv ASP, Inc. The company specializes in developing, manufacturing, and supplying passive safety systems to the automotive industry.
Autoliv's product range centers on enhancing occupant safety within vehicles. Their passive safety systems, including airbag modules, side-impact airbag protection systems, seatbelts, steering wheels, inflators, and battery cut-off switches, significantly reduce the severity of injuries sustained in traffic accidents. Airbag modules, for instance, rapidly inflate and deflate upon impact, cushioning occupants and preventing contact with the vehicle interior.
Advanced seatbelt technologies, such as pretensioners and load limiters, contribute to a 60% reduction in serious frontal crash injuries. Autoliv also manufactures steering wheels that prioritize safety, functionality, and aesthetics.
To expand its offerings, Autoliv established Mobility Safety Solutions. Leveraging its expertise, the company develops and produces mobility safety solutions encompassing pedestrian protection, battery cut-off switches, connected safety services, and safety equipment for two-wheeler riders.
Autoliv operates as a single reportable segment, focusing on passive safety products – primarily airbags, including steering wheels, and seatbelts. In 2023, the company achieved sales of $10.5 billion, with airbags and steering wheel products accounting for approximately 67% of sales and seatbelt products making up about 33%.
The company's operations span several geographical regions, including the Americas, Europe, China, and other parts of Asia. In 2023, the top five customers contributed around 48% of Autoliv’s consolidated sales, while the top ten customers accounted for about 78%, reflecting the concentration of manufacturers in the automotive industry. Typically, delivery contracts cover the entire lifespan of a vehicle model, usually between five and seven years, depending on customer platform sourcing preferences and strategies.
Trends, Competition, and Strategy Overview
Consumer demand for vehicle safety fuels market growth, driven by an increased focus on Vision Zero, ageing populations, urbanization, and stricter government regulations. The electric vehicle trend also presents opportunities for advanced safety systems.
The automotive passive safety market hinges on light vehicle production (LVP) and content per vehicle (CPV). LVP refers to the total number of cars, trucks, vans, and SUVs manufactured globally. CPV represents the average value of passive safety components installed in each vehicle, such as airbags and seatbelts.
Despite recent supply chain challenges, LVP has grown steadily and is projected to reach nearly 90 million by 2026. While Autoliv can only align with top-selling platforms for LVP, it directly influences CPV through innovation.
Since 1997, Autoliv's sales have outpaced the market, growing at a compound annual growth rate (CAGR) of around 5% compared to the market's 2.8%. This success stems from consistent technological advancements, a strong emphasis on quality, and a global presence. Autoliv's global market share in passive safety has climbed from 27% in 1997 to approximately 45% in 2023.
While high-income markets boast an average CPV of around $330, driven by new safety systems like active seatbelts and improved pedestrian protection, it's the medium and low-income markets that offer significant growth potential, with an average CPV of about $200. The expected rise in overall CPV in both regions, particularly in the lower CPV markets, will dilute the global average. However, the passive safety market is projected to grow from $23 billion in 2023 to over $25 billion in the next three years, indicating promising opportunities in these markets.
Autoliv's continued market leadership relies on a steady stream of innovations, unwavering quality focus, and a robust global footprint.
Steering wheels, where Autoliv holds a 40% market share, will experience the highest growth due to increasing demand for high-end features. Seatbelts, with Autoliv commanding a 45% share, benefit from strong technological leadership and global reach. Airbags, at a 47% market share, will expand due to rising installation rates of inflatable curtains, side airbags, and knee airbags.
Of course, there is competition. ZF, a significant competitor, specializes in driveline and chassis technology alongside passive safety systems. Joyson Safety Systems (JSS), formed from the merger of Key Safety Systems and Takata, is another key player.
Regional competitors like Tokai Rika and Toyoda Gosei for Toyota and Mobis for Hyundai/Kia often enjoy strong ties with domestic automakers. Other notable competitors include Nihon Plast, Ashimori, Yanfeng, Jinheng, Samsong, and Chris Cintos de Seguranca, who collectively share the remaining market share.
Autoliv operates in a competitive landscape characterized by intense pricing pressure. While newer products often face steeper price reductions, older products with slower growth and limited redesign potential also experience price erosion.
Economic cycles and raw material fluctuations further impact pricing. While 2017 to 2021 saw average price reductions of 2-4% annually, the situation reversed in 2022 and 2023 due to rising raw material costs, leading to renegotiated terms and net price increases.
Cost reduction is central to Autoliv's competitiveness. The company aims for at least 5% annual savings through productivity improvements, optimized production footprint, restructuring, and overall cost management. Based on lean manufacturing, the Autoliv Production System (APS) drives efficiency and resource optimization. The One Product One Process (1P1P) strategy standardizes products and processes, reduces complexity, and optimizes the supply chain.
Additional initiatives focus on automation, digitalization, supply chain management, and research and development efficiency. While the COVID-19 pandemic disrupted productivity targets in recent years, Autoliv anticipates renewed progress with stabilized supply chains and increased automation.
Quality remains paramount for Autoliv. Despite industry-wide recall challenges, the company has maintained a strong track record, with involvement in only about 2% of industry recalls over the past decade compared to its 45% market share. This underscores Autoliv's commitment to quality and ability to deliver reliable products.
Autoliv, Inc. Economic Moat
There are many ways to identify Autoliv, Inc.’s economic moat, but I focus on these 5 sources. The rating is purely subjective and is based on my in-depth understanding of the company.
Economic Moat: Narrow
Autoliv's economic moat primarily stems from its intangible assets. A robust brand reputation as a safety pioneer solidifies customer trust and preference, creating intangible value. The company's extensive research and development efforts and vast patent portfolio provide a technological edge crucial for product innovation and maintaining a competitive advantage.
Furthermore, Autoliv's deep understanding of safety regulations across various markets allows it to comply efficiently and potentially influence industry standards.
While Autoliv benefits from economies of scale, the industry's competitive nature limits its impact. The company's focus on lean manufacturing and operational excellence offers some cost benefits, but the industry's competitiveness often balances these. Efficient supply chain management also contributes to cost reduction; however, this advantage can be fleeting due to the complexities of the global supply chain and the necessity of securing critical components.
Autoliv occupies a specialized market with limited major players. Strong relationships with automotive manufacturers and significant market share deter new competitors. The industry's stringent regulations, which Autoliv expertly navigates, further hinder entry.
The high switching costs in the automotive safety components market are a significant barrier to potential competitors. The rigorous testing and certification processes, the integration into vehicle designs, and the long-term contracts required for safety components make switching suppliers a costly and time-consuming process. Autoliv's proven reliability and safety record further reinforce these switching costs, solidifying its position in the market.
Given the critical nature of automotive safety components, manufacturers are reluctant to switch due to potential risks associated with unproven alternatives. Autoliv’s proven reliability and safety record further reinforces these switching costs, solidifying its position in the market.
Autoliv, Inc. Performance
My quick performance checklist:
Has Autoliv, Inc.'s revenue consistently grown year over year for the past five years? There was a dip during the COVID-19 pandemic, but a general trend indicates that the revenue is growing.
Is the net income consistently increasing year over year for the past five years? There was a dip during the COVID-19 pandemic, but its net income remains relatively flat.
Has the cash flow from operating activities shown consistent year-over-year growth for the past five years? No. Although it has remained positive over the past five years, it is inconsistent.
Has the free cash flow remained positive for the past five years? Yes.
Is the gross margin % consistent or growing over the past five years? Yes, it has remained consistent at a range of 16% to 18% over the past five years.
Has the EPS shown growth over the past five years? No, it has been relatively inconsistent over the past five years, with a slight dip in the fiscal year 2020.
Autoliv’s 2023 sales surged across all primary product lines. Steering wheels and inflatable curtains contributed most to this growth, followed by side and passenger airbags. Gross profit climbed by $425 million, buoyed by price hikes, increased volume, and reduced premium freight costs. However, higher personnel and energy expenses offset some gains.
Several factors shaped Autoliv’s performance in 2023. Supply chain disruptions caused erratic customer orders, and rising labor, logistics, and utility costs necessitated price negotiations with clients. Despite these challenges, the company outpaced the overall market, fueled by price increases, higher product content per vehicle, and robust order intake.
LVP skyrocketed in 2023, surpassing initial S&P Global projections. Europe and China led this growth, driven by easing production constraints, inventory replenishment, and successful new model launches. North America also experienced significant LVP expansion.
Autoliv’s sales outperformed LVP growth due to strong order intake and increased safety content per vehicle. New model launches, including Subaru Impreza/Crosstrek, Mercedes E-Class, BMW 5 Series, and Zeekr models, boosted sales.
Has free cash flow per share increased over the last five years? No, it has been inconsistent over the last five years.
Management Effectiveness
Has Autoliv, Inc.'s ROE stayed within or above the 12%-15% range year over year for the past five years? It has stayed above 15% over the past five years except for the fiscal year 2020, when it slipped to 8%.
A company having a ROE higher than the industry average is generally considered positive. It can be a sign of strong management that the company is making good use of company resources to create better returns as compared to its competitors.
Has the ROIC stayed within or above the 12%-15% range year over year for the past five years? No, it has been hovering around 6% to 11% over the past five years.
When ROIC is greater than WACC, it means that the company's investments are earning a higher return than what it costs to pay for those investments. This means they are using their money well and creating value for their shareholders.
The trendline for the number of shares outstanding is declining, which would please an investor.
On 16 Nov 2021, Autoliv announced that its Board of Directors approved a new stock repurchase program that authorizes the company to repurchase up to $1.5 billion or up to 17 million shares, whichever comes first, between Jan 2022 and the end of 2024.
Autoliv, Inc. Financial Health
Current Ratio: 1.0 (fail my requirement of >1.0, but <3.0)
I use the current ratio instead of the quick ratio to analyze the company’s liquidity. This is because I want a general overview of financial health and the company’s inventory is a significant asset and easily be converted to cash.
The trend of its current ratio has been decreasing over the past five years, which is generally not a good sign.
A declining ratio suggests the company has fewer current assets relative to its current liabilities. This could make it harder to pay off bills on time. If the trend continues, it could indicate the company is struggling financially and may have difficulty covering its operating expenses.
Autoliv, Inc.'s current ratio is worse than its industry average of 1.5, which is below the industry median.
Debt-to-EBITDA: 1.7 (pass my requirement of <3.0)
This ratio measures a company's ability to pay off its debt with its operating income. A higher ratio may indicate higher financial risk, while a lower ratio suggests more manageable debt levels relative to earnings.
I use the debt-to-EBITDA ratio instead of the net debt-to-EBITDA ratio because I want a straightforward view of the company's gross leverage, focusing on the total debt burden without accounting for cash reserves.
Debt-to-EBITDA can present a more conservative view of a company's financial risk by not considering cash. It is useful for me to understand the worst-case scenario regarding the company's ability to service its debt. Also, it helps that every company has different cash management strategies.
Autoliv, Inc.’s debt-to-EBITDA ratio has remained relatively flat over the past five years. Compared to its industry, it is better, as it is below the industry median of 2.3.
Interest Coverage: 8.4 (pass my requirement of >3.0)
Debt Servicing Ratio: 9.2% (pass my requirement of <30.0%)
Autoliv, Inc. Stock Performance
The primary exchange market for Autoliv’s securities is the New York Stock Exchange (NYSE), where Autoliv’s common stock trades under the symbol “ALV”. Autoliv’s Swedish Depositary Receipts (SDRs) are traded on NASDAQ Stockholm’s list for large market cap companies under the symbol “ALIV SDB”.
The graph and table below show the cumulative total shareholder return for Autoliv common stock since 31 Dec 2018. The graph compares its performance to that of the S&P 500 and the Dow Jones US Auto Parts Index.
The comparison assumes $100 was invested at the closing price of Autoliv common stock on the NYSE on 31 Dec 2018. Each of the returns shown assumes that all dividends paid were reinvested.
Autoliv, Inc. Intrinsic Valuation
Estimated intrinsic value: USD $57.68
Value is calculated using the discounted cash flow method (considering their cash and debt) and scenario planning.
Average free cash flow used: USD $320M
Projected growth rate: 10% - 14%
Beta: 1.5
Discount rate: 10.5%
Ideal margin of safety: 50% (Uncertainty: High)
Price range after the margin of safety: <USD $29.00
Date of calculation: 31 Jul 2024
I use the past five years' free cash flow and apply a weighted average, focusing more on the recent years. I then round the average to the nearest tens. In some instances, I use a more realistic number to represent the free cash flow.
The total debt and cash and short-term investments are the last quarter figures that are rounded to the nearest tens. In some instances, I use more realistic numbers to represent them.
Autoliv, Inc. Relative Valuation
My Concerns
Autoliv’s fortunes are directly tied to global light vehicle production, a sector known for its cyclical nature. Economic fluctuations, consumer trends, technological shifts, fuel costs, and government policies can dramatically impact automotive sales and, consequently, Autoliv’s revenue. Regional disparities exacerbate these effects, with certain areas more vulnerable to economic downturns.
Inventory levels held by Autoliv’s customers introduce further volatility. Unpredictable inventory adjustments can disrupt production schedules, affecting revenue and financial health. Consumer financing programs also influence inventory levels, compounding the uncertainty. These factors directly impact Autoliv’s financial targets and earnings guidance.
Another risk factor is the growth rate of safety content per vehicle, which is subject to changes in consumer trends, political decisions, crash test ratings, and safety regulations.
In 2023, the average global content of passive safety systems per light vehicle was estimated at $261, with higher values in premium markets and lower in growth markets like China and India. Autoliv's operating results could suffer if growth in global LVP remains concentrated in regions with lower passive safety content.
Product liability, warranty, and recall claims pose significant risks to Autoliv. Despite quality investments, product defects or failures cannot be eliminated.
Increasing regulations and reporting requirements heightens product liability investigations and claims risk. While product liability insurance is maintained, coverage adequacy, availability, and cost are uncertain. A substantial product liability claim or recall could severely impact operating results, cash flow, and financial condition.
Recall costs, including uninsured expenses, government inquiries, litigation, and reputational damage, can be substantial. Autoliv’s involvement in the vehicle design process increases its exposure to recall-related costs. Furthermore, global product designs amplify the potential impact of defects, as failures can affect a larger number of vehicles. Warranty claims, including those related to supplier-guaranteed products, also contribute to financial risk.
Dependency on a few large customers further increases Autoliv's vulnerability. In 2023, the top five customers accounted for around 48% of sales. Losing business from a significant customer could materially affect the company.
Customer consolidation could further reduce bargaining power. Quality issues could result in new business holds, affecting order intake and requiring additional resources. Financial difficulties or bankruptcy of a major customer could lead to substantial losses if invoices go unpaid or contractual commitments are legally modified.
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