Description

Company Description/Thesis

Autoliv (NYSE: ALV) is the world’s largest automotive safety supplier with sales to all the leading car manufacturers in the world.  With revenues of approximately $6.2bn, Autoliv develops, markets and manufactures airbags, seatbelts, safety electronics, steering wheels, anti-whiplash systems, night vision systems, and other active safety systems while maintaining a market share in excess of 1/3 of the global market.  Headquartered in Sweden (it also has Swedish Depository Receipts listed on the Stockholm Exchange) , Autoliv is truly a global company, with facilities and factories located around the world and 54% of sales in Europe, 26% in North America, 9% in Japan and 11% in the Rest of the World.  Its management team is exceptional.

We believe that the company will make approximately of $4.60 in 2007 and in excess of $5.00 in 2008.  Despite a “perfect storm” of declines in light vehicle production, record raw material prices and negative currency effects, the company has continued to operate at record margins the last couple years.   Given the visibility of its earnings stream as well as continued upside from the adoption of its side airbag in the United States, its cost cutting efforts, and its opportunities in active safety, we believe that Autoliv represents a safe, yet compelling, investment at current levels and should deliver 15%+ annualized returns at these levels.

Core Business

Autoliv’s core business is comprised of two segments: seatbelts ($4bn in sales) and airbags ($2bn in sales).  On the top line, these revenues are relatively visible.  Contracts are awarded approximately three years before production starts and each contract typically involves one vehicle platform and is usually valid as long as that platform is produced (approximately 4-5 years).  Moreover, given Autoliv’s position as the technology leader in automobile safety, Autoliv has an impenetrable moat in its manufacturing and development of its core products.

The company has benefited and will continue to benefit from the adoption of side airbags in North America.  A voluntary commitment forged by Alliance of Automobile Manufacturers and the Insurance Institute for Highway Safety and agreed to by car makers selling 99% of cars in the United States stipulates that 50% of cars will meet stringent side-impact protection standards by Model Year 2008 and 100% will meet these standards by Model Year 2010.  By comparison, while the penetration rate of these side airbags was approximately 60-70% in Europe in 2005, it was a mere 20% in North America.  Though side airbags are not required per se, they are in fact the easiest and most economical way for car makers to meet the standards and are what car makers are using.   

Also, while worldwide light vehicle production should grow approximately 2-3% per year, there is a tremendous opportunity in the rest of the world (RoW).  The company has increased its sales at an average rate of approximately 25% since 1997, and the region now accounts for 11%.  This growth should continue, as safety content per vehicle in the RoW is significantly less than in North America/Europe.  For example, the estimated average safety content per vehicle in India is $60, while it is $350 in Western Europe

The company maintains a diversified customer mix.  Total sales to the Big 3 North America account for approximately 15% of sales, and no contract accounts for more than 5% of consolidated sales.   Its largest customer, Ford, accounts for 21% of sales, with Ford North America comprising only 6%.  While the OEMs certainly exhibit pricing pressure on its suppliers, Autoliv has been able to protect and in some cases even expand its margins through the continued engineering of its products.

Moreover, despite record raw material prices, a precipitous (relatively speaking) decline in light vehicle production, and negative currency effects (that have since turned), the Company continues to operate at record margins as it focuses on cost reductions while awaiting an uptick in sales.  For example, Autoliv has reallocated several of its jobs to low labor-cost countries.  In the third quarter alone, the company cut 400 jobs in its high labor-cost countries (e.g., France, Sweden), while adding 1,600 in its low labor-cost countries.  It should be noted that the net increase was due to growth capex.

The company has also identified cost opportunities in sourcing from low labor-cost countries, but is in the very early stages of capitalizing on them.  This ability to proactively manage its cost structure has enabled Autoliv to maintain industry leading margins and returns on invested capital while its competitors continue to struggle in what has been a difficult environment for suppliers the last couple years.

Active Safety

Autoliv is also beginning to enter into the active safety space.  Products currently on the market or in development include Autoliv’s night vision system, electronic stability control systems and safety telematics. Although the development of the active safety industry is somewhat nascent, Autoliv should be a major player in the coming years.

Management

Management has proven that they are among the best operators in the industry, as they’ve navigated a particularly difficult environment with moderate success.   There has not been any significant management turnover in the last several years, and the CEO, Lars Westerberg and CFO, Magnus Lindquist, are very well-regarded within the industry.

Management is also shareholder oriented, deploying capital in a prudent and transparent manner.  Since 2000, the company has repurchased 22.8mm shares, leaving approximately 82mm outstanding.  The company discloses the number of shares it repurchases on a daily basis on its website.

Valuation

The company should make approximately $4.60 in 2007, and $5.00+ in 2008, as Autoliv realizes operating leverage from sales on its new platform vehicles and increased sales of side airbags.  These numbers do not include any significant contribution from active safety.

We believe the company deserves at least a 15x multiple – given its earnings growth (and visibility) and its inherent advantages as a technology leader -- the company spends approximately $350mm per year on R&D, and holds 8% of all automotive industry safety patents.

Light vehicle production downturn

Raw materials

Currency

Product liability

Catalyst