Whew! And Yay!
Whew, that it looks like someone else is going to win the bidding to acquire what’s left of airbag maker and Autoliv competitor Takata.
Yay, that the likely acquirer is an airbag maker owned by China’s Ningbo Joyson Electronic.
I’m relieved that it increasingly likely that Autoliv (ALV) won’t spend the next millennium trying to figure out how to salvage something from the wreckage of Japan’s Takata. You remember Takata right. A leading maker of airbags and other safety equipment for cars that went down in flames when it was found to have hidden evidence that its airbags were exploding, sending pieces of metal flying through the front section of cars. In January Takata agreed to plead guilty and pay a $1 billion criminal penalty in the United States for fraud. Takata’s airbags have been linked to at least 17 deaths and more than 100 injuries. The Takata recall has affected more than 100 car models sold by 13 automakers. You think sorting through that would have been just a bit of a distraction for Autoliv? I’d much rather the company put all its attention on growing its active electronic safety systems business.
The news out of the bidding to acquire Takata’s assets got even better for Autoliv when KSS, a U.S. maker of airbags owned by China’s Ningbo Joyson Electronic, emerged as the leading bidder. Buying crucial systems from a Chinese-connected supplier is already creating worries at companies such as Toyota and Honda. Besides the question of whether auto makers who have been subject to recalls of millions of vehicles due to safety “problems” at Takata are willing to trust the quality of the airbags made by a Chinese-connected supplier, foreign automakers are increasingly sensitive to giving Chinese companies too much leverage over their supply chains at a time when the Chinese government has been flexing its muscles to give an edge to domestic manufacturers.
Autoliv didn’t exactly knock the ball out of the park when it reported fourth quarter earnings on February 2. Earnings of $1.71 missed Wall Street projections by 13 cents a share. At $2.6 billion (up 32% year over year) revenue for the quarter fell short of projections by $90 million. The shares fell more than 7% on the news going from $116.39 to $106.80 on February 2. Shares closed at $103.23 on February 7.
Actually, in my opinion, the results weren’t as bad as the decline in shares indicated–especially for a company that is investing heavily to win as big a share as possible in the fast growing active safety systems market. Organic sales grew by 7.2% for the year and sales including acquisitions were up 10%. Sales in the Active Safety business, this business is the reason that I added Autoliv to my Jubak Picks portfolio on April 29,2016 at $121.23 a share, grew by 16% in the year. Unit sales of electronic controls grew by 12.4% in 2016 from 2015 and unit sales of active safety sensors–the stuff that enables cars to warn when they’re drifting out of the lane or to apply the brakes when they sense a collision is looming–climbed 32% (including acquisitions.)
The problems at Autoliv came as the company discontinued some earlier brake control products and saw an earlier than expected downturn in some GPS products. The active safety sensor business is horrendously competitive right now and it is taking Autoliv longer than expected to rack up design wins and contracts from auto makers. The goal of $1 billion in end of the decade sales from the active safety business was, consequently, pushed back by a year. As a result of that environment and the company’s continued investment of 6.5% to 7% of sales in research and engineering, return on capital fell to 21% in 2016 from 24% in 2015. Free cash flow climbed to $369 million in 2016 from $301 million in 2015.
For 2017 Autoliv guided to organic sales growth of 4% with an additional 1% growth attributable to acquisitions. Operating margins will be about 8.5%.
Right now Wall Street analysts see revenue growth accelerating to 6% in 2018 as the company’s investments in technology start to pay off. That upturn is a piece down the road, however, so I’m lowering my 12-month target price to $120 a share from the prior $149 a share. Shares of Autoliv are down 14.58% as of February 7 since I added the stock to my Picks portfolio.