The auto industry has made an amazing recovery since the financial crisis, with U.S. automakers having seen stratospheric growth in sales. That has not only helped their stocks but also lifted the prospects for the companies that supply it with vital systems and components that go into today's high-performance vehicles. One of the big beneficiaries of the rise in auto sales is Autoliv (NYSE:ALV), which is the company responsible for making many of the airbag protection systems, seat belts, and other safety equipment that you'll find in new cars and trucks. In Thursday morning's fourth-quarter financial report, Autoliv showed just how well it has jumped on its money-making opportunity, boosting profit substantially beyond what investors had expected to see. Yet some investors question whether Autoliv can keep up its pace going into 2015. Let's take a closer look at Autoliv and its prospects over the coming year.
How Autoliv motored forward
Autoliv dramatically outperformed its own expectations both for revenue and operating margins, which contributed to a big boost in earnings for the company. Autoliv had sales of $2.35 million, with gains in organic revenue coming in at around 5%, well above the 2% it had originally projected. Similarly, adjusted operating margins came in at 10.1%, ahead of its 9.5% target and helping to produce adjusted earnings per share of $1.81, which was more than 10% higher than the $1.63-per-share consensus estimate among those following the stock.
Autoliv's segment results accentuated just how difficult it was for the company to overcome the impact of a strong U.S. dollar. Revenue for the airbag segment fell 0.9%, and seat-belt-related sales dropped a more precipitous 3.5% for the quarter. Yet currency impacts were responsible for about five percentage points of declines, and so on an organic currency-neutral basis, Autoliv saw growth of about 4% in airbags and 2% in seat belts. Side-impact airbag systems were especially strong, even as passenger airbags showed weakness.
One small but growing segment of Autoliv's business taps the active safety device market, with items like rearview cameras, night-vision systems, and driver-assistance equipment helping to drive segment revenue up 40%. With major customers including Mercedes, Jeep, and BMW, Autoliv has helped pioneer active safety systems and could continue seeing positive results in the future.
CEO Jan Carlson expressed optimism about the results. In addition to the solid results, Carlson mentioned how "Autoliv returned a record $811 million to our shareholders through dividends and buybacks," demonstrating the commitment the company has to its investors.
What does Autoliv's road ahead look like?
Looking forward, Carlson announced that the company would reorganize into two segments, with one focused on passive safety systems while the other combines the active-safety business into a broader electronics division. With a goal of reaching annual sales of $2 billion for the Electronics segment by 2019, with $1 billion of that coming from sales of active-safety products, Autoliv clearly sees the potential of new technology to revolutionize automotive safety.
Yet even with these positive moves, Autoliv still sees financial hurdles ahead. Although its outlook projects 3% higher organic revenue for the current quarter and 6% growth for the full year, Autoliv believes that adverse currency effects will send overall sales down almost 5% for the quarter, which is worse than investors currently expect. Similarly, a strong dollar will likely wipe out organic sales growth for 2015, leaving the company with minimal gains in reported revenue.
Nevertheless, Autoliv continues to have confidence in its own prospects. During the fourth quarter, the company bought back about 1.9 million shares, spending $186 million. Moreover, Carlson sees more opportunities later in the year, noting that "[o]ur full year growth rate for active safety will be affected by the fact that new launches will mainly come in the later part of 2015." As Autoliv spends more on research and development, the payoff from its initiatives could grow even larger.
Despite the negative impact of the dollar, investors were pleased about Autoliv's results, sending shares up more than 5% by midday. As long as Autoliv can keep moving forward even as economic challenges hit key areas like the eurozone, then shareholders can expect stock prices to overcome short-term currency impacts and reflect the rising confidence in Autoliv's ability to maintain its strong relationships with its supply customers.