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On October 26 Autoliv (ALV) reported third quarter earnings of $1.47 a share, 12 cents a share above the Wall Street consensus. Revenue climbed just 1.6% year over year to match the analyst projection at $2.5 billion.
The problem in the quarter was revenue growth–or actually the lack thereof. Organic sales grew by just 0.5%, even lighter than guidance for 0% to 2% growth. And the company cut its forecast for full 2017 organic revenue growth to 1% from the prior 2% growth.
The company made no bones about what it’s going through: “The third quarter turned out essentially as we had expected, Autoliv CEO Jan Carlson said. “We are in the midst of an intense period of preparing for our future growth, while delivering at the high end of our guided margin range for the quarter.”
That future is called “autonomous vehicles.” Autoliv believes, with good reason in my opinion, that autonomous vehicles will require more active safety systems of exactly the kind that Autoliv makes. (The company is also the global leader in passive safety systems such as seat belts and airbags.)
The company spent a huge 7.3% of third quarter sales on research and development and engineering and expects spending in that category to come to 7% for the full 2017 year. It signed five new technology collaborations with Seeing Machines, Ericsson, MIT, Adient and MobilityXlabs. And the company acquired technology in LiDAR and Time of Flight cameras from Fotonics. Right now the company’s spending on active systems for autonomous vehicles isn’t paying off–Autoliv repositioned itself in this area in 2014 and products are mostly in the design in and testing stage with customers right now. The good news here is that the average life of a product after a customer has designed it into a car is five to 10 years.
What you’re buying if you own Autoliv is a well-managed bet on the future of active safety in cars and in autonomous vehicles in particular. Patience required. As of November 14, I’m raising my target price on shares of Autoliv in my Jubak Picks portfolio to $134 from the prior $120. The shares closed at $122.93 today, November 14. They up 0.38% since I added them to this portfolio on April 29, 2016.