Stock of the Day
<<<<<Found this article interesting as SMU is now a small bit player in a product they originated.>>>>>>
Nov 13, 1998
Autoliv: Side-Impact Airbags to the Rescue
With Asia still in crisis and the 7-year US economic expansion aging quickly, the thought of investing in a cyclically sensitive company that makes auto parts has to be approached with some skepticism. Nonetheless, the stock of Sweden-based Autoliv (NYSE:ALV - news) has come alive lately, surging from the mid-$20s a month ago to $33.75 currently. The rising stock price reflects Autoliv's gain in its share of the global market for auto safety systems such as airbags and seatbelts. Further, the growing use of side-impact airbags appears to be offsetting the overall slowdown in vehicle sales growth, at least for now.
Another reason Autoliv's stock price rebounded last month was relief that it had not suffered aftereffects from the GM strike as badly as some of its smaller competitors such as Breed Technologies (NYSE:BDT - news) . Indeed, for the latest quarter Autoliv reported sales up 12% and earnings per share up 8%. The company cited "a record number of product launches, exceptionally strong demand for the company's side-impact airbags and a 25% increase in seat belt sales."
Several months ago, the US Government announced expanded standards for head protection to include side-impact head airbags. The National Highway Safety Administration had planned for new rules that take effect in September to require extra padding in the roof and roof pillars for head protection, but the broader standards will allow the more effective head airbags to satisfy the requirement.
Several high-end carmakers such as BMW, Mercedes-Benz and Volvo already offer some form of inflatable head protection in addition to the now-mandatory steering wheel and dashboard airbags. The NHSA standards change comes just as all of the automakers, not just luxury nameplates, are realizing that safety sells.
In addition to the standard airbag products, Autoliv makes side impact protections systems including a new curtain-style airbag that mounts in the roof and inflates in side-impact collisions. The curtain is designed to cover the window to not only buffer the head from side impact but also shield the driver and passenger from flying glass and other foreign objects. Autoliv began commercial shipment of the Inflatable Curtain earlier this year.
Another new product which recently launched is the AntiWhiplash Seat, designed to protect against neck injuries in rear-end collisions. In the pipeline, Autoliv has developed a product called the Inflatable Carpet (InCa) which protects the feet, ankles and lower legs in frontal collisions.
New products such as these are crucial for airbag makers because the airbag business has suffered severe pricing pressures in recent years. Competition from low-cost, foreign-based manufacturers and cost-cutting efforts by automakers have sliced profit margins on the standard airbag business. New products like the side-impact airbags should give the leading-edge manufacturers more breathing room.
Autoliv is a Swedish company which bought U.S.-based Morton International's airbag business last year. The company has been working down production costs at the North American facilities as well as bringing new production capacity in Australia on line. During this transition, though, the airbag price pressures took their toll on profits, and the stock slumped from as high as $45.50 last September to the $30 area for much of this year.
But in a recent Business Week interview, Andrew Cormie, co-manager of JP Morgan's new Global 50 Equity Fund, called Autoliv "a high-quality
company that recently has performed poorly in the market." Cormie went on to say "We think we've got one or two more quarters of poor pricing in the market and then it will stabilize," and he is looking for 50%-100% appreciation in two years' time.
Analysts expect Autoliv to sustain its return to year-over-year earnings growth in the coming quarters, but for all of 1998 it is still seen posting a slight one-cent decline due to a weak first quarter. Next year earnings are expected to grow 23% to $2.22, according to the consensus estimate from analysts, with a long-term growth rate of 17%.
Pricing trends in the airbag market will need to be watched closely, with competition intensifying not only from fellow giant TRW (NYSE:TRW - news) but also the smaller players like Breed and Simula (NYSE:SMU - news) . It's also important to recognize that the auto industry is very cyclical, so with the U.S. economy in its seventh year of expansion and the Asian crisis dragging down worldwide economic growth, investors should be on guard for a turn in the business cycle.
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