Autoliv (ALV), a leading airbag and seat belt manufacturer, has disappointed investors. Its recent Q2 top-and-bottom-line misses and a downscaled FY24 forecast for organic sales growth of 2% year-over-year, a significant reduction from the earlier 5% estimate. The company attributes these changes to a forecasted 3% slump in global light vehicle production (LVP) this year. Nevertheless, Autoliv’s management remains optimistic about future profitability, marking this dip as a bump in the road, not a long-term trend.
Since last week’s announcement, the stock has shed over 10% and could continue to fall until LVP recovers. Investors may want to hold off until the price declines, then consider it a “buy on the dip” opportunity.
Autoliv Grappling with Market Slowdown
Autoliv is a global company specializing in developing, manufacturing, and supplying passive safety systems to the automotive industry, with its reach extending to Europe, the Americas, China, Japan, and other Asian regions.
The company has reported a recent decline in global light vehicle production, which it attributes to volatility in the supply chain that, although lower than the previous year, has not improved from the first quarter of 2024. The firm has expressed concerns about low customer demand visibility and frequent changes to customer call-offs, which have negatively impacted Autoliv’s production capacity and profitability. Despite slight improvements, the company expects shares volatility to continue throughout 2024, albeit at a lower rate than 2023, but will remain higher than pre-pandemic levels.
The company has also reported experiencing inflationary pressures, especially labor costs, negatively impacting profitability. However, the company has offset most of these costs with price increases and other forms of customer compensation.
Raw materials prices have had a negligible impact on profitability but are expected to increase slightly during the rest of the year. Management currently focuses on productivity and cost reduction measures to counter these inflationary pressures and aims to seek inflation compensation from its customers.
Analysis of Autoliv’s Recent Financial Results & Outlook
For the second quarter of 2024, the company reported revenue of $2.60 billion, which fell short of analysts’ expectations of $2.74 billion. However, organic sales increased by 0.7% despite a decrease in net sales by 1.1%. The operating margin was 7.9%, with an adjusted operating margin of 8.5%. Profits improved despite the sales decline, primarily due to successful cost-reduction measures and increased pricing. The company’s operating income was $206 million, with an adjusted operating income of $221 million. Still, reported earnings per share (EPS) of $1.87 fell short of consensus estimates of $2.20.
Autoliv reported an operating cash flow of $340 million and a free cash flow of $194 million. The company paid a dividend of $0.68 per share and repurchased and retired 1.31 million shares.
Management has lowered its FY24 forecast, expecting a 2% growth in organic sales, a negative 1% foreign exchange effect on net sales, and an adjusted operating margin of around 9.5-10.0%. This lowered forecast is attributed to an expected 3% decline in global light vehicle production. Despite this, the company forecasts an increase in profitability in the second half of the year, expecting margins of around 11% to 12%.
Is ALV Stock a Buy?
The company started the year strong, beating Q1 expectations, and the stock climbed up over 15% through May. However, the fall in LVP caused investors to pull back, and shares have dropped 22% since. Shares trade at the lower end of the 52-week price range of $87.79 – $129.38 and demonstrate ongoing negative price momentum, trading below the 20-day (108.52) and 50-day (112.48) moving averages.
Analysts following the company have taken a cautious stance on the stock. For example, Wells Fargo analyst Colin Langan reiterated a Hold rating with a price target of $103.00 after the Q2 earnings miss and a reduced 2024 guidance, noting the reduction in organic growth guidance, reflecting the challenges in the market.
Overall, Autoliv is rated a Moderate Buy based on the recommendations and price targets issued by 17 analysts. The average price target for ALV stock is $126.75, representing a potential upside of 27.80% from current levels.
Final Analysis on ALV
Despite falling short on Q2 results and downsizing its FY24 forecast, Autoliv remains optimistic about its profitability potential in the latter half of the year. Management is focusing on cost-reduction measures and price increases to counter inflationary pressures as it anticipates a slight rise in raw materials prices later this year. These strategic cost-reduction efforts will position the company well for improved profitability when the market recovers. With shares having dropped, potential investors should consider this a prime “buy on the dip” opportunity once the descent eases.
