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Autoliv to Benefit from Strategic Alliances, Risks Remain

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On Dec 28, we issued an updated research report on Autoliv, Inc. (ALV - Free Report) . The company faces stiff competition in the passive safety product market along with high customer concentration. However, Autoliv expects to record an improvement in both organic and consolidated sales in full-year 2016. The company’s planned joint venture (JV) with Volvo should boost earnings over the long haul. Apart from acquisitions and JVs, the company also boosts shareholders’ value through capital deployment and product launches.

Autoliv reported adjusted earnings of $1.63 per share in the third quarter of 2016 that comfortably surpassed the Zacks Consensus Estimate of $1.38. Also, earnings increased 6.5% from $1.53 reported a year ago. Earnings per share, on a reported basis, amounted to $1.56 in third-quarter 2016 compared with $1.12 in third-quarter 2015.

Consolidated revenues improved 12.7% year over year to $2.46 billion and beat the Zacks Consensus Estimate of $2.45 billion.

Autoliv expands its business through acquisitions and JVs. In Sep 2016, it signed a letter of intent to form a JV with Volvo Cars. Profits from the JV will be divided between the companies and hence should boost Autoliv’s earnings going ahead.

Autoliv also actively pursues capital deployment strategies to boost shareholders’ value. In 2015, the company returned $300 million to its shareholders through dividend payouts and share repurchases. Moreover, in Feb 2016, Autoliv hiked its quarterly dividend payout by 3.6% to 58 cents per share. These strategies help maintain the efficient capital structure of the company.

Autoliv’s organic sales are projected to increase around 7% in 2016. The recent acquisitions of ANBS and MACOM should have a positive impact of about 5% on sales. However, currency translation will have a 1% adverse impact on sales. Based on these factors, consolidated sales are expected to rise 10%. Adjusted operating margin, excluding costs for capacity alignments and antitrust related matters, is likely to be more than 8.5% in 2016.

Though Autoliv occupies a leading position in the market, it faces stiff competition in passive safety products from Takata Corporation and TRW Automotive Holdings Corp., which was acquired by the German group, ZF Friedrichafen. Autoliv also faces significant risks due to customer concentration.

Price Performance

Autoliv has underperformed the Zacks categorized Auto/Truck-Original Equipment industry so far this year. The company lost 9.9% so far this year, while the industry saw a 5.1% increase. Projections of flat growth in China next year and guidance cut for 2016 adjusted operating margin impacted the stock.



Zacks Rank & Key Picks

Autoliv currently carries a Zacks Rank #3 (Hold).

Better-ranked companies in the auto space include Allison Transmission Holdings, Inc. (ALSN - Free Report) , America's Car-Mart Inc. (CRMT - Free Report) and GKN plc .

America's Car-Mart has a long-term growth rate of 56%. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Allison Transmission and GKN carry a Zacks Rank #2 (Buy). Allison Transmission has a long-term growth rate of 11% while GKN projects long-term growth of 6.2%.

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