Autoliv Inc.: Strong Growth Obscured by Weak Currencies

On the surface, it would appear that Autoliv (ALV -1.15%) reported pretty poor third-quarter numbers before the market opened on Friday. That view would be based on its reported GAAP numbers, which saw revenue, operating income, and earnings per share all slip lower versus the third quarter of last year. However, the problem with this view is that it's through the lens of weak foreign currencies. If we adjust that lens to keep currencies constant, we get a much clearer picture of the company's stronger underlying performance.

Autoliv results: The raw numbers

Source: Autoliv.  

What happened with Autoliv this quarter?
Autoliv performed much better than the raw numbers seem to indicate.

• Autoliv prefers to report organic sales, which strips out the impact of currencies. For the third quarter, organic sales grew 8% year over year, which topped the company's guidance for organic sales growth of "more than 7%."
• Margins, likewise, need to be adjusted. When we do, Autoliv's operating margin improves from 7.2% to 9.4% for the third quarter. That result is both 90 basis points higher than the third quarter of last year and ahead of the company's own guidance range for an adjusted operating margin of "around 9%" for the quarter.
• Sticking with that adjusted theme, earnings, likewise, improve dramatically when adjusted. Autoliv's adjusted earnings for the quarter were $1.53 per share, which is 22.4% higher than the adjusted result from the third quarter of last year.
• Driving these solid adjusted results were strong organic sales growth in Europe, which was up 11%, as well as within the company's Active Safety product category, where organic sales were up 36%.

What management had to say
Autoliv CEO Jan Carlson wrote in the earnings release that he was "pleased with Autoliv's overall performance in the quarter." He went on to note: "Our strong growth outperformed the light vehicle production in all regions. We saw double-digit growth in Europe, Japan, and the rest of Asia, which combined account for around half of Autoliv's total sales."

While most of Autoliv's business is running on all cylinders, Carlson did caution, "In China ... given the current uncertainty, we continue to implement short-term measures, including adjusting manufacturing capacity to mitigate the margin effect from fluctuating volumes."

This isn't the only auto-related company growing more cautious on China. General Motors (GM -0.05%) CEO Mary Barra spent a bit of time on the company's third-quarter conference call detailing GM's outlook on China. She said:

As we talk about China, it is quickly maturing, and we now expect average annual industry growth to be about 3% to 5% for the next few years. And the China slowdown is not only affecting our business in China but also in the other international operation markets outside of China, because these economies are so dependent on China. This means growth will remain slow.

What's interesting about the GM CEO's comments is that she sees slowing Chinese growth affecting its sales not just in the country, but also in countries that depend on China for their growth. This is an outlook that Autoliv investors need to keep an eye on, because it would affect demand not just for new vehicles but also for auto safety products.

Looking forward
Despite the concerns in China, Autoliv sees organic sales growing around 9% in the fourth quarter over what it saw in last year's fourth quarter. Further, it sees its adjusted operating margin to be around 10.5% for the quarter. That will push full-year organic sales up by about 7% from 2014, while its adjusted operating margin will hover around 9.5% for the full year.