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Autoliv (ALV) Pops More Than 9% in Tuesday's Trading: Know Why

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Shares of Autoliv Inc. (ALV - Free Report) shot up 9.23% yesterday to close the session at $75.42 after the company reiterated its 2022 guidance despite the multiple industry woes. This Stockholm-based supplier of automotive safety systems notified that it is actively making efforts to adapt to new business conditions. Investors seemingly welcomed the fact that the firm is making intended price increase negotiations with customers to counter commodity inflation and supply chain disruptions.

We know that the auto industry is reeling under microchip shortage — a byproduct of the COVID-19 pandemic that was only worsened by the Russia-Ukraine war — which is limiting vehicle supply. While demand is still strong, automakers are unable to meet the same amid supply chain disruptions and chip famine. The resurgence of COVID-induced lockdown in China has further compounded the problems. In April, light vehicle production (LVP) in China declined 40% year over year. While the figures for May remained flat on a year-over-year basis, IHS Markit now estimates second-quarter LVP in China to drop 11% more than its previous forecast.

In the light of such circumstances, Autoliv’s price increase negotiations with customers are yielding results and compensating for the commodity inflationary pressure. Additionally, ALV is implementing cost containment initiatives to support its medium-term targets. It has backed its 2022 guidance of organic growth and adjusted operating margin in the band of 12-17% and 5.5-7%, respectively.

Having said that, we believe it’s prudent to take advantage of yesterday’s price appreciation and the cash out of the stock now. Its worth noting that although the company has reaffirmed its guidance, its forecast of an adjusted operating margin of 5.5-7% is lower than 8.3% recorded in 2021. The chip crisis, soaring costs of raw materials, high capex requirements and unfavorable currency translations are likely to limit Autoliv's margins. While the company seems to be undertaking cost mitigation efforts, investors should wait for a clearer picture to ascertain whether the company is on the right track. Until then, it's better to avoid Autoliv.

The Zacks Consensus Estimate for 2022 earnings implies a year-over-year decline of 13%. The consensus mark has moved south by 51.4% in the past 60 days to $4.37 a share. The stock currently carries a Zacks Rank #5 (Strong Sell).

If you wish to invest in the auto space, consider placing bets on stocks like Lithia Motors (LAD - Free Report) , Penske Automotive (PAG - Free Report) and Group 1 Automotive (GPI - Free Report) While Lithia and Penske sport a Zacks Rank #1 (Strong Buy), Group carries a Zacks Rank #2 (Buy).

Lithia is valued at around $7.8 billion. The Zacks Consensus Estimate for LAD’s 2022 earnings has been revised 10.6% upward over the past 60 days. The company has a projected earnings growth rate of 19.5% for 2022.Lithia's aggressive buyouts and the Driveway platform are likely to boost its prospects. Robust cash flows and investor-friendly moves of the firm are further driving shareholders’ confidence.

Penske is valued at around $8 billion. The Zacks Consensus Estimate for PAG’s 2022 earnings has been revised 3.4% upward over the past 30 days. The company has a projected earnings growth rate of 13.7% for 2022. Penske’s spree of buyouts, low leverage and commitment to maximize shareholder value augur well.

Group 1 is valued at approximately $2.8 billion. The Zacks Consensus Estimate for GPI’s 2022 earnings has been revised 11.8% upward over the past 60 days. The company has a projected earnings growth rate of 23% for 2022. In 2021, Group 1 completed transactions representing $2.5 billion of acquired revenues. The AcceleRide platform, its online retailing initiative, active at most of the firm’s U.S. dealerships is likely to aid Group 1’s long-term prospects. 

You can see the complete list of today’s Zacks #1 Rank stocks here