Expansion Into China And India And EV Focus Will Improve Future Prospects

Key Takeaways

• Expansion in Chinese and Indian markets and focus on EVs are expected to boost revenue and market share.
  
• Automation and digitalization initiatives should enhance operational efficiency and positively impact margins.
  
• Adverse regional production trends and supplier costs pose challenges to Autoliv's revenues and margins, while customer-led volatility threatens inventory and earnings stability.

Catalysts

Through its subsidiaries, develops, manufactures, and supplies passive safety systems to the automotive industry in Europe, the Americas, China, Japan, and rest of Asia.

• Autoliv plans to reduce its indirect workforce by up to 2,000 with expected savings of $50 million in 2024, which should enhance net margins through cost reductions.
  
• Expansion in emerging markets, particularly with Chinese and Indian OEMs, is expected to boost revenue growth, with China projected to comprise an increasing portion of sales by 2025.
  
• The company is capitalizing on the transition to electric vehicles (EVs), launching several new products with higher content per vehicle, which should drive increased revenue and potentially higher margins through more advanced and high-value offerings.
  
• A strong emphasis on product innovation and partnerships in the rapidly growing Chinese car market is expected to drive revenue growth as Autoliv increases its market share with Chinese OEMs from 20% in 2022 to 32% by 2025.
  
• Ongoing strategic initiatives like automation and digitalization are projected to improve operational efficiency, thus likely impacting net margins positively over the coming years.

Autoliv Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Autoliv's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 7.7% in 3 years time.
• Analysts expect earnings to reach $881.8 million (and earnings per share of $13.73) by about December 2027, up from $630.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.0 billion in earnings, and the most bearish expecting $769.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2027 earnings, down from 11.8x today. This future PE is lower than the current PE for the US Auto Components industry at 18.6x.
• Analysts expect the number of shares outstanding to decline by 6.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.48%, as per the Simply Wall St company report.

Autoliv Future Earnings Per Share Growth

Risks

• The unfavorable regional light vehicle production mix, driven by reductions in North America and similar trends in Europe and Asia (excluding China), could significantly impact Autoliv's top line performance, affecting overall revenues.
  
• Supplier settlement costs of $40 million, expected to gradually decrease over the next few quarters, along with ongoing supplier cost inflation, may strain net margins and reduce operating income.
  
• The dependency on compensation for inflation from customers, which may require renegotiation, could create uncertainty around sustained pricing adjustments, impacting the company's ability to maintain stable earnings into 2025.
  
• Volatility in customer call-offs remains a concern, making it challenging to efficiently manage inventories and thereby pressuring working capital and operating margins.
  
• The decline in light vehicle production projected for key markets like North America and Europe could hinder sales growth and further deteriorate net income if these adverse trends persist.

Valuation

• The analysts have a consensus price target of $115.96 for Autoliv based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $140.0, and the most bearish reporting a price target of just $101.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $11.5 billion, earnings will come to $881.8 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 7.5%.
• Given the current share price of $94.34, the analyst's price target of $115.96 is 18.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.