TRW’s debt to equity ratio at the end of 2012 was 0.38, while the firm covered its interest expenses with operating income 10.1 times in 2012. By contrast, Autoliv’s financial health metrics look much healthier, with a debt to equity ratio at the end of 2012 at 0.15, and an interest coverage ratio of 17 times in 2012. TRW’s poorer financial health relative to Autoliv may have contributed to TRW skimping on spending on R&D. In 2012, TRW only spent $164 million of its own funds on R&D (or just 1% of sales), while Autoliv spent $455 million of its own funds on R&D, representing a whopping 5.5% of sales. Autoliv Inc. (NYSE:ALV)’s increased R&D spending relative to TRW will allow it to innovate better safety equipment products than its competitor, in my opinion, strengthening Autoliv’s competitive position within the auto safety equipment space going forward.
Thoughts on Valuation & Conclusion
Despite its tremendous growth potential, Autoliv is still trading at decent valuation multiples. As of July 9, 2013, Autoliv was trading at 15.1 times trailing twelve month (TTM) earnings, which is pretty close to the P/E ratio for the broader U.S. market such as the S&P 500 despite Autoliv’s better-than-average growth profile. Granted, TRW was trading at 9.2 times TTM earnings as of July 9, but TRW is also a much weaker competitor than Autoliv, as I previously explained. A better comparison to Autoliv might be auto mirror manufacturer Gentex. Like Autoliv, Gentex is a strong, entrenched player within its niche sector (automobile mirrors) with a history of innovation and a strong R&D budget to keep the innovation pipeline flowing and competitors at bay. For example, Gentex’s 2012 R&D spending represented a solid 7.7% of total revenue. However, Gentex was also trading at a steep 20.1 times TTM earnings as of July 9, 2013. By comparison, investors can scoop up Autoliv Inc. (NYSE:ALV), another solidly positioned auto part supplier with a very attractive growth profile, at a much more reasonable 15.1 times P/E ratio. Given its modest valuation, solid competitive advantages, and a robust growth profile, Autoliv is undoubtedly an interesting stock for investors looking for growth at a reasonable price.
The article Autoliv is a Growth Stock Hidden in a Mature Industry originally appeared on Fool.com and is written by John Park.
John Park has a long position in Autoliv. The Motley Fool recommends Autoliv and Gentex. The Motley Fool owns shares of Gentex. John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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