Autoliv Remains Neutral

We have reiterated our Neutral recommendation on Autoliv Inc. (ALV - Analyst Report) for the long-term as the company maintains a stable market share globally, supported by the increasing importance of vehicle safety needs. However, we are concerned about significant customer concentration risks faced by the company.

The company recorded a 45% fall in profits to $100.5 million or $1.07 per share in the first quarter of 2012 from $181.5 million or $1.93 in the corresponding quarter of the prior year. It missed the Zacks Consensus Estimate by 54 cents per share. Revenues increased marginally by 3% to $2.2 billion.

Autoliv is continuously extending its footprint in the low-cost countries (especially China and Romania). The company has growth opportunities pouring in from these countries due to a rise in demand for light vehicles. This is leading to increase in production and higher demand for automobile protection products. Expenditures in these countries are about 55% lower than that of high-cost countries.

Reduction in debt obligation will increase the operational flexibility of the company. Total debt of the company reduced to $678.0 million from $747.0 billion as of March 31, 2011. It also expects a 3% growth in sales in the second quarter of 2012.

However, Autoliv is under threat due to customer concentration. About 74% of revenues are generated from the top ten customers. Nissan contributes around 12%, Ford 18% and General Motors 11% of revenues.

Autoliv’s margin expansion has suffered a set back owing to concessions offered to the OEMs to help them maintain their profitability. Shortage of components due to natural disasters in Japan and Thailand in 2011 also affected the company’s ability to generate revenues.

Autoliv, based in Stockholm, Sweden, manufactures occupant restraint systems for automobiles and has a product portfolio consisting primarily of safety airbags, seat belts and steering wheels. The major customers of the company include General Motors Company (GM - Analyst Report), Nissan Motor Co. (NSANY), Ford Motor Co. (F - Analyst Report) and Daimler AG (DDAIF)), BMW and others.

Our long-term recommendation is backed by Zacks #3 Rank on the stock, which translates into a short-term (1 to 3 months) Hold rating.