Best International Stock: Autoliv

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Motor vehicle collisions and fatalities are a sad fact of life. The World Health Organization pegs the annual global casualty count at a million people, a number expected to grow with increasing automobile use in the developing world. Working to thwart this terrible toll is Autoliv (NYSE: ALV  ) , an industry leader in the markets for automotive airbags, seatbelts, and related safety equipment.

With a global market share exceeding 30%, Autoliv lays claim to spearheading virtually all major technological breakthroughs in the occupant-restraint industry over the past two decades. Its products save more than 20,000 lives annually, it is estimated, and prevent 10 times as many severe injuries. 

All that makes for a good story, but what makes Autoliv a superior international stock?

Global safety
Simply put, the company is everywhere. Based in Sweden, the company has 80 subsidiaries in 28 countries, and 20 crash-testing tracks in 12 countries. It deals with all major vehicle manufacturers, including Japanese giant Toyota (NYSE: TM  ) , Korea's Kia Motors, France's PSA Peugeot Citroen, and America's Ford Motor Co. (NYSE: F  ) .

In addition to its international client list, Autoliv is in the middle of a multiyear strategy to wring costs from its operations by purchasing supplies and components in low-cost countries such as Mexico, China, and Poland. In 2003, just 9% of components were sourced from low-cost countries; that number is expected to be 50% by the end of 2009. Labor is also being shifted to low-cost locales, with 47% of personnel in such areas at the end of 2006.

Containing costs is one thing, but Autoliv is also primed by a trio of growth drivers. First, the worldwide market is growing nicely, although it may not appear that way if your vantage point is the U.S. or Japan. But Eastern Europe and non-Japan Asia are powering worldwide growth of 9% annually. Second, Autoliv continues to bolster market share, particularly with the companies that have been gaining share themselves (that would be Toyota and Honda (NYSE: HMC  ) ). Finally, the value of safety content per vehicle continues to rise, both in emerging markets (seatbelts and basic airbags), and in developed markets (side curtain airbags, knee airbags).

Unrestrained focus on shareholder value
Autoliv generates considerably more cash than it needs, and company management seems obsessed with returning value to shareholders. Since 2002, Autoliv has plowed seemingly every penny of free cash flow into ever larger dividends and stock repurchases.

2002

2003

2004

2005

2006

2007

Divided/Share

$0.44

$0.54

$0.75

$1.17

$1.36

$1.52

Share Repurchases ($ millions)

$30.4

$43.0

$143.9

$377.8

$221.5

$386.9*

 
* Estimated based on Autoliv's published repurchase history, and an assumed exchange rate of 6.4 Swedish kronor to the U.S. dollar.

The stock currently yields 3.2% (and I expect another dividend increase in the next quarter or two), and the company has retired nearly a quarter of its shares over the past half-decade.  And yet, the stock price is roughly where it was three years ago.

Frankly, I think Autoliv is absurdly cheap. The company trades at an enterprise value-to-EBITDA ratio of 6 times, perhaps reflecting stagnant expectations for growth. Yet even assuming only modest growth of 8% for the next five years, and penalizing the company for its outstanding debt, operating lease commitments, pension plans, and stock options, my discounted cash flow model yields a value of more than $57 today. As Autoliv continues its repurchase strategy, expect this gap between price and value to continue to widen in our favor.

The Foolish bottom line
Autoliv is truly a stock with huge potential. Face it, vehicular safety requirements will only increase, and newly affluent citizens of emerging markets aren't going to eschew safety. Add in management's cost consciousness and focus on returning value to shareholders, and Autoliv is a tremendous long-term investment. Tell us what you think in Motley Fool CAPS. Rate Autoliv outperform, or, if you disagree (seek help), rate it underperform. Based on your responses, we'll declare the best international stock for 2008 early next week.


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