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Morningstar | Autoliv Reports Disappointing 2Q, Reduces 2019 Guidance; Maintaining $80 FVE

Narrow-moat-rated Autoliv, supplier of airbags, seatbelts, and steering wheels to the global auto industry, reported earnings per share before special items of $1.38, disappointing market expectations; the consensus estimate was $1.48. The result was also $0.84 below the $2.22 EPS (pro forma for the spin-off of Veoneer) reported last year. We think the underperformance versus the market was attributable to a strike at a Mexican facility and high negative operating leverage from a heavy launch schedule on top of lower customer volume in the second quarter. Despite management's lowered full-year guidance, the stock reacted positively as the reduction in guidance was not as severe as expected. Even so, shares remain 3-star-rated, reasonably priced relative to our estimates for revenue, cash flow, and return on invested capital.

Management's guidance includes organic revenue growth of 1%-3%, down from prior guidance of 5%. Consolidated full-year revenue growth of negative 1% to positive 1% reflects negative currency translation assumed at negative 2%. Adjusted operating margin guidance for 2019 is down 1-1.5 points to 9.0%-9.5% from prior guidance of 10.5%. Our 2019 estimates include a 2% revenue decline and adjusted EBIT margin of 9% on worse China demand but slightly better European volume (barring a no-deal Brexit) versus management expectations. We also lowered our 2020 estimates to revenue of $9.15 billion, from $9.55 billion, and adjusted EBIT margin of 10.9%, from 11.8%. The time value of money since our last update would have caused our fair value estimate to rise to $81.40 per share. However, after the changes to our 2019 and 2020 estimates, our $80 fair value estimate is unchanged.

Second-quarter consolidated revenue declined 2.6% to $2.15 billion from $2.21 billion reported a year ago, but excluding a negative 3.1% currency effect, it would have been up 1.5%. The Americas region bucked the consolidated decline with a solid increase of 11.1%. Airbag group revenue was off slightly, down 0.2%, while seatbelt group revenue declined 7.1%. We think revenue performance demonstrates solid organic growth, outpacing a 7.6% decline in global light-vehicle production by 9.1 percentage points.

Adjusted operating margin during the quarter contracted 190 basis points to 8.5% from 10.4% in 2018 due to higher raw material costs, the strike, and unfavorable operating leverage. The Mexican strike was not aimed at Autoliv, but local labor, both at auto and nonauto manufacturers, walked out in protest for higher wages. Autoliv has a heavy launch schedule currently ramping up and coming in the second half of 2019. Higher spending for the backlog of new business, combined with unfavorable operating leverage on programs already in production, resulted in unusually high margin contraction, partially offset by management's cost-reduction efforts.