Autoliv Makes Cars Safer Not Portfolios

“Taking a look at stocks moving early on here, shares of Autoliv are rallying, maker of air bags and seat belts raised the fourth quarter sales target and helping the stock today.” — The Opening Bell on Fox Business

Autoliv (ALV), the world’s largest producer of airbags for autos out of Sweden, is seeing their stock rise following an upbeat guidance for 2010. Autoliv sees positive trends in Chinese auto sales as well as inventory rebuilding leading to fourth quarter sales increases of 35%. That is an improvement over the previous forecast of 25%. In addition to the sales outlook, management said that operating margins will rise by 9 percent, again better than previous forecasts. Obviously, they are seeing business substantially pick up in order to lift guidance on the fiscal quarter that ends this month. The stock has traded nearly 5% higher in Friday trading and the ADR (traded on the NYSE) has seen nearly twice the average shares changing hands.

Surely, this is a welcome prospect to Autoliv investors after an extremely difficult year to be a supplier for the auto industry. Government programs such as Cash for Clunkers and similar programs in Germany and elsewhere have induced buyers into the market through rebates, and that flurry of activity is one reason for ALV’s improved forecast. Furthermore, Autoliv sees improved sales in emerging markets like China as a major driver of growth. China has recently overtaken the U.S. for the largest car marketplace. However, even with this growth in the second half, the company is going to finish the year with revenue down 20% from a year ago and earnings just one-sixth the level of last year. It got so bad that the company was forced to suspend its dividend early in 2009 in order to fortify the balance sheet.

We are concerned that the market has already priced in the inventory rebuilding cycle. Analysts are expecting earnings to rebound in fiscal 2010 and have been ratcheting up expectations over the last month. At Ockham, we are concerned that the stock is overheated and have placed an Overvalued rating on shares. The stock has nearly doubled in the last year, but the price is supported by lower fundamentals than in the past. For instance, the market has historically been willing to pay price-to-cash earnings multiple of between 5.6x and 11.5x, but as of the most current data is well above that range at a price-to-cash earnings multiple of 15.5x. Price-to-sales for ALV in the last ten years has been between .47x and .81x, and the current metric is near the high end of that .76x. Not to mention, the company’s restructuring plans are going to be 20%-40% more expensive than the original $100 million estimate.

Now, we are not saying that the stock is going to have a negative return going forward; however, it is clear that a lot of fundamental improvement has already been priced in. Any disappointment to future auto sales could easily lead to another difficult period for Autoliv. Value investors should look elsewhere for a safe place to stash their cash. There are plenty of stocks that are attractively valued to take advantage of a global auto sales recovery.

Autoliv Makes Cars Safer Not Portfolios

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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