Autoliv: Too Much Uncertainty

Elevator Pitch

I continue to have a Hold investment rating assigned to Autoliv, Inc. (NYSE:ALV) stock. Earlier, I touched on ALV's prospects relating to top line growth and margin expansion with my prior update published on April 14, 2023.

With this current article, my attention turns to Autoliv's share repurchases, and the effects of a potential U.S. automotive workers' strike on the company. ALV has the financial capacity to execute on substantial share repurchases this year, but the company's actual buybacks might be below expectations considering its year-to-date repurchases and its management commentary. Separately, Autoliv has been prudent in setting its guidance and it is geographically diversified, but a workers' strike (if materialized) in the U.S. auto industry will still hurt the company's performance to some extent.

There is too much uncertainty to have a clear Buy or Sell rating for Autoliv. As such, I leave my existing Hold rating for ALV unchanged.

Share Buybacks

ALV's actual share buybacks could possibly fall short of the market's expectations, taking into account the company's year-to-date share repurchases and its recent management comments. Autoliv's stock price might pull back in the event that the company fails to impress investors with its shareholder capital return.

At the company's 2023 Investor Day on June 12 this year, Autoliv highlighted that it has "around $900 million in capacity for shareholder returns." This amount is significant, as $900 million is equivalent to more than 10% of ALV's current market capitalization of approximately $8.4 billion. This implies Autoliv could potentially offer a total shareholder yield (buybacks and dividends) of over 10% for the current fiscal year, assuming that it utilizes its full capacity for capital return. The company also stressed at its Investor Day that its share buybacks should "continue to pick up pace" for the remainder of this year, and also mentioned that "M&A (a competing capital allocation choice) for us has a lower priority."

ALV's management commentary at the current year's Investor Day raised expectations for the company's actual share repurchases in 2023.

But Autoliv's actual share buybacks in the first half of this year have been much lower than expected. Specifically, ALV spent $42 million and $41 million on share repurchases in the first and second quarters of 2023, respectively. This represents a mere fraction of Autoliv's $1.5 billion share buyback plan, which was initiated at the start of 2022 and will expire by the end of 2024.

More significantly, Autoliv clarified at the company's most recent Q2 2023 results call that the "$900 million in capacity for shareholder returns" indicated at its 2023 Investor Day "was not any type of indication what we would buy back this year or any commitment in that sense." ALV also emphasized at the second quarter earnings briefing that it is proceeding with buybacks "with some cautiousness" and keeping a close eye on "how the world around us is developing."

In other words, it is possible to infer from ALV's comments and its below-expectations 1H 2023 buybacks that there is no guarantee that ALV will execute on $900 million worth of share repurchases and complete the $1.5 share buyback program in full by end-2024.

Potential U.S. Automotive Workers' Strike

A recent September 9, 2023, Seeking Alpha News article mentioned that:

"the probability of a major strike of U.S auto workers continues to increase after the United Auto Workers (or UAW) rejected separate contract offers from General Motors (GM), Ford (F), and Stellantis (STLA)."

If the U.S. automotive workers' strike does materialize, this will affect automotive suppliers, including Autoliv.

On one hand, ALV's actual revenue and earnings in the near term might be hurt by the disruption in automotive production relating to the workers' strike.

The sell side currently has positive expectations of Autoliv's financial performance in the current year, and a prolonged workers' strike could lead to below-expectations results for ALV. 18 of the 21 Wall Street analysts covering ALV stock have raised their full-year FY 2023 top line projections in the last three months. The current consensus sell-side analysts' financial estimates point to Autoliv's revenue growth accelerating from +7.4% for FY 2022 to +16.8% in FY 2023.

ALV's top line expansion could turn out to be weaker than expected, if U.S. automotive production is negatively impacted by the workers' strike. Considering the high fixed cost nature of automotive suppliers' business operations, Autoliv's bottom line is likely to take a bigger hit than revenue due to negative operating leverage in the event that the workers' strike does happen.

On the other side of things, Autoliv is diversified, and the company has been conservative with its guidance, so the actual impact of the workers' strike could be less significant than feared.

The Americas region only accounted for roughly a third of ALV's revenue in the most recent fiscal year as disclosed in the company's FY 2022 10-K filing. Separately, ALV indicated at its second quarter results briefing that "the UAW (United Auto Workers) risk could be there", but stressed that its guidance implies a "slightly more conservative view than S&P (Global's automotive industry forecasts)" with regard to the "light vehicle production outlook."

Concluding Thoughts

Autoliv, Inc.'s outlook is murky, implying that a Hold rating for the stock is appropriate. In the best case scenario, Autoliv executes on close to $900 million of share repurchases in 2023 and the automotive workers' strike in the U.S. doesn't last for a long time. In the worst case scenario, the UAW strike is prolonged and the company's actual buybacks for the current year disappoint investors.

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