When most investors think about the auto parts industry, they tend to envision a mature, cyclical industry that grows at roughly the same pace as GDP and lacks attractive growth opportunities. However, adopting this kind of mainstream perspective may cause investors to overlook Autoliv Inc. (NYSE:ALV), a manufacturer of automobile safety equipment that has a long history of innovation and, in my opinion, the potential to grow its profits much more rapidly than the auto industry as a whole during the coming years. I believe Autoliv is the best-positioned player within the auto safety equipment manufacturing niche, as direct competitor TRW Automotive Holdings Corp. (NYSE:TRW) is strapped down by poor financial healthy that has crimped its ability to spend on research and development (R&D), and therefore continue innovating cutting edge safety equipment. Autoliv’s modest valuation multiples, especially compared to those of other auto part suppliers with similarly strong competitive positions, such as Gentex Corporation (NASDAQ:GNTX), means that Autoliv shares should appeal not only to growth investors but to value seekers as well.
Proud Heritage and a Bright Future
Autoliv Inc. (NYSE:ALV) has long been one of the largest and most successful automobile safety equipment manufacturers in the world. Since its founding six decades ago, the Swedish company has pioneered safety innovations such as the three-point seat belt and side-impact air bags. As the auto industry has evolved over the decades, the dollar amount of safety equipment installed in the average vehicle has steadily increased, partly due to regulatory demands, and partly due to consumer preferences for higher auto quality standards. As the emerging economies in Asia, South America, and other places continue to become wealthier, consumers in those nations will likely demand increased safety features in their cars. In its June 2013 presentation, Autoliv demonstrated that a huge gap exists between the safety equipment dollar content per vehicle in developed countries versus those in developing economies.
Safety Equipment Content per Vehicle, by Country
As consumers in developing economies such as India, China, and Brazil become wealthier, it is likely that they will also demand vehicles with the latest safety features, helping to close the gap in safety content per vehicle between developing and developed countries depicted in the chart above. Therefore, even if the absolute number of vehicle sold around the globe does not grow at a particularly rapid rate, Autoliv can still expand its profits at a robust clip because of the seemingly inevitable rise in the dollar content of safety equipment per each vehicle sold.
Can Autoliv Fend Off the Competition?
Although Autoliv Inc. (NYSE:ALV) is not the only player within the auto safety equipment sector, it is the best positioned manufacturer within the niche, in my opinion. Autoliv’s major competitor within the sector is TRW Automotive, which has similarly enjoyed a long and successful history of innovation. However, TRW’s relatively poor financial health has crimped its ability to spend on R&D, which is critical to innovating and fleshing out the development pipeline of cutting-edge safety equipment.