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On Jan 10, we maintained our Neutral recommendation on Autoliv Inc. (ALV - Analyst Report) based on raised guidance, dividend hike and expectation of organic sales growth. However, we are concerned about stiff competition and high dependence on a few customers. Moreover, the Eurozone crisis is weighing on the company’s performance.

Why the Reiteration?

On Oct 24, 2013, Autoliv reported third-quarter 2013 earnings of $1.29 per share, lagging the Zacks Consensus Estimate of $1.33. Earnings improved 5% from $1.23 per share reported in the third quarter of 2012. The improvement can be attributed to lower effective tax rate and interest expense.

Consolidated revenues rose 9% year over year to $2.12 billion, beating the Zacks Consensus Estimate of $2.07 billion. The rise was driven by higher organic sales in all regions, particularly Europe, along with favorable vehicle mix in China.

Following the release of third-quarter results, the Zacks Consensus Estimate for Autoliv’s 2013 earnings fell 0.7% to $5.64 per share. The Zacks Consensus Estimate for 2014 increased 0.3% to $6.32 per share.

Autoliv increased its dividend for the first quarter of 2014 by 4% to 52 cents per share. The dividend will be payable on Mar 6, 2014, to shareholders of record as on Feb 20, 2014. The company also renewed the mandates to repurchase up to 3.2 million shares. These strategies will help maintain the efficient capital structure of the company.

The company expects consolidated and organic sales growth of 9% in the fourth quarter with an operating margin of 9%, excluding capacity alignments and anti-trust investigations costs. For full-year 2013, the company increased the guidance for organic sales growth to 5% from the previous estimate of 4%. Operating margin is expected to be around 9%.

However, we are concerned about the Eurozone crisis due to operating inefficiencies related to underutilized capacity, capacity alignment action and strong growth in steering wheels, which further pressurizes the capacity alignment. The company also faces a challenging situation in Brazil owing to supply-chain issues.

Other Stocks That Warrant a Look

Better-ranked stocks in the industry in which Autoliv operates include Gentex Corp. (GNTX - Snapshot Report), Visteon Corp. (VC - Snapshot Report) and Modine Manufacturing Co. (MOD - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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