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Morningstar | Autoliv's First Quarter Disappoints but Guidance Confirmed; Maintaining $80 Fair Value Estimate

Narrow-moat-rated Autoliv, supplier of airbags, seatbelts, and steering wheels to the global auto industry, reported earnings per share before special items of $1.20, disappointing market expectations that had the consensus estimate pegged at $1.56. The result was also $0.63 below the $1.83 EPS (proforma 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 volumes in the first quarter. Even so, management maintained full-year guidance. The stock reacted positively with a 3% increase, but shares remain 3-star rated, reasonably priced relative to our estimates for revenue, cash flow, and return on invested capital.

Management guidance includes organic growth revenue growth of 5%, partially offset by a 2% negative currency translation, for a consolidated full-year revenue growth of 3%. Adjusted operating margin guidance for 2019 is flat with 2018, at 10.5%. Our 2019 estimates include 3.7% revenue growth and adjusted EBIT margin of 10.5%, on slightly better European volume (barring a no-deal Brexit) versus management expectations, especially in the second half.

First-quarter 2019 consolidated revenue declined 3.0% to $2.17 billion from $2.24 billion reported last year but excluding a negative 5% currency effect, would have been up by 2%. The America's region bucked the consolidated decline with an improvement of 11.4%. Airbag group revenue was flat while Seatbelt group declined 8.9%. We think revenue performance demonstrates solid organic growth, outpacing a 7% decline global light vehicle production by 9 percentage points.

Adjusted operating margin during the quarter contracted 320 basis points to 7.7% from 10.9% 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 non-auto 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.