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On Mar 15, we maintained our Neutral recommendation on Autoliv Inc. (ALV - Analyst Report), despite its poor performance in the fourth quarter of 2012, based on the rising importance of vehicle safety needs and continuous expansion into low-cost countries.

Why Maintained?

On Jan 31, 2013, Autoliv witnessed a 14.7% fall in earnings per share to $1.45 in the fourth quarter of 2012 from $1.70 a year ago due to capacity alignment and antitrust investigation costs and increase in shares outstanding by 2.7% to 95.8 million, partially offset by lower effective tax rate. However, EPS exceeded the Zacks Consensus Estimate of $1.32.

Revenues inched up 0.4% to $2.1 billion on higher sales of Seatbelt and Active Safety products, partially offset by lower Airbag product sales.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for 2013 declined 4.8% to $5.59 per share. Meanwhile, the Zacks Consensus Estimate for fiscal 2014 declined 2.2% to $6.30 per share. Autoliv currently retains a Zacks Rank #3 (Hold).

Autoliv benefits from its expansion in the low-cost regions of Romania and China. The company has opportunities in these countries due to the rise in demand for automobile protection products for the increased light vehicle production. In addition, the cost of production in these countries is 55% of that in higher-cost countries.

Autoliv also expects to experience favorable impacts from reduction in debt obligation, which in turn will increase operational flexibility. The company’s total debt reduced to $632.7 million as of Dec 31, 2012 from $666.3 million as of Dec 31, 2011.

However, Autoliv faces challenges from concentrated customer base. Its top three customers, including Ford Motor Co. (F - Analyst Report), Renault-Nissan and General Motors Company (GM - Analyst Report), accounts for a roughly 20%, 15% and 10% of the company’s sales. The top-5 contributes about 60% of sales and the top-10 represents nearly 75% of sales.

Other Stocks to Consider

Gentherm Incorporated (THRM - Snapshot Report), a Zacks Rank#1 (Strong Buy) stock, is currently performing well in the industry where Autoliv operates.

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