The Smart Way to Play the Global Auto Boom
With the maturity of the automotive industry in developed markets, the real growth potential lies primarily in emerging markets. Emerging markets account for close to 40% of the global market and were recently estimated to have produced 30 million vehicles. By most measures, China is already the largest automotive market in the world and accounts for an estimated 20% of global assembly in emerging markets.
The automotive incumbents, including the Detroit Three in the United States, Toyota and Honda in Japan, and Volkswagen and Daimler in Europe, are opening factories in these newer markets, including BRIC countries (Brazil, Russia, India, China) where vehicle assembly recently surpassed North America’s.
Emerging markets are also creating their own class of large auto firms, including Beijing Automotive Industry Holding Group (BAIC), which purchased Saab from General Motors (NYSE: GM) back in 2009, as well as Zhejiang Geely Holding Group, which bought Volvo from Ford (NYSE: F) in early 2010. Tata Motors (NYSE: TTM) in India has championed a mass-market car with its Nano, which sells for only a couple thousand dollars. Korea is also pushing on to the global stage with its Kia and Hyundai brands.
Despite the slow growth of the auto market in the United States and Europe, safety has increasingly been emphasized in vehicles. Side-impact air bags are becoming extremely popular and represent the fastest-growing product line on the auto-safety market. Additionally, an emphasis on safety features is still in its infancy from emerging-market producers, as they first must develop markets and are still in the learning curve portion of efficient manufacturing techniques to scale up their operations.
Autoliv (NYSE: ALV) is the undisputed market leader in automotive safety systems across the globe. It holds an estimated 40% market share in side-impact safety bags, air bags, seatbelts, safety electronics, whiplash protection systems, night-vision systems, radar and other active safety systems. Of last year’s total sales of $7.2 billion, 67% stemmed from air bags, with 33% from seat belts and related products.
Given these sales levels, Autoliv currently owns about half the automotive safety market. Autoliv’s sales have grown consistently and steadily, expanding close to 10% annually in the past decade. Annual profit growth has been more impressive, at 12% during this same period. Growth has stemmed primarily from emerging markets, which in 2007 represented 11% of sales, but have more than doubled to a recent 23% of sales. China and Korea make up the largest of these emerging markets.
Autoliv is also very well managed. Returns on invested capital are currently exceeding 25%, while returns on equity are almost as impressive at close to 20%. These are well above historical levels, which again are due to faster and profitable growth in newer auto markets in the world but is also anchored by steady sales in developed markets.
Autoliv anticipates continued strong automotive-safety market growth. The company currently estimates the entire market will grow by 36% by 2012 to close to $20 billion. Emerging markets will represent one third of the market. In terms of products, airbags will represent 52% of the total market, seat belts will make up just more than a quarter of the market and newer technologies using electronics will account for the rest.
Action to Take –> Autoliv’s compelling growth prospects come at a reasonable price. The stock is trading at a forward P/E of only 11.4. The trailing free cash flow multiple is even more reasonable at 10.5. The stock should follow the operational growth of the company and return about 10% annually for buy-and-hold shareholders. Throw in a current dividend yield of 2.2%, and total returns could be at least 12% for the foreseeable future.
I think Autoliv can grow its profits by 10% for the next 10 years. Discounting these free cash-flow projections back to the present leads me to an intrinsic value estimate of $100 per share, or about 30% above current share price levels. This represents a decent entry point for investors to own a market leader that effectively owns the market for airbags and safety belts, and that could see steady growth in developed markets and very robust growth in emerging markets for many years to come.