Todd Lowenstein is a portfolio manager with the Highmark Value Momentum Fund, and oversees more than $440 million in assets. Autoliv is a Swedish producer and supplier of automotive safety systems to vehicle manufacturers worldwide. Mr. Lowenstein spoke to David Dalley of The New York Sun and explained why Autoliv is in his portfolio.

What does Autoliv do?

It’s an integrated auto safety company. They make things like safety restraints, air bags, seat belts, child seats, and infrared night vision for vehicles. They’re the global leader and they have 35% worldwide market share. The beautiful thing about this industry is that the top three companies control 75% of the market. It’s an oligopoly-type structure. And that top group is increasing its market share all the time.

The company is in a very, what you might call undervalued, misunderstood, and out-of-favor industry – namely the auto parts industry. That’s what we look for – companies that are out of favor, misunderstood, and therefore often undervalued. This stock is very well positioned going forward over the next three to five years.

Why is it a strong buy?

Well it has sales of $6.5 billion, it yields about 2.5%, and the stock is selling at about 13 times 2006 consensus earnings. That’s a discount to its largest competitor, TRW, which is currently trading at 15 times earnings. It’s basically a cheap stock. And not just on a PE basis but also in terms of price to sales, price to book, and price to cash flow. It has very low debt – debt to capital is 16% – it has high free cash flow at 8.5%, and the company is very shareholder friendly. It returns a lot of excess cash to shareholders in the form of buybacks. Combine the dividend with the buybacks you’ve got between a 10% and 11% cash return to shareholders.

We also like that it has only 15% exposure to the American auto industry, much less than other companies like Adelphi. High exposure to the American auto industry is a bit of a risky position to be in right now. ALV’s business is 55% in Europe and 30% in Asia.

What will drive the stock going forward?

In terms of growth, auto production grows at around 2.5% a year, but the real driver is increased adoption of vehicle safety systems by auto manufacturers around the world. The main reason is the increasingly stringent auto safety regulations internationally as well as an attempt by established auto makers to use safety as a mark of distinction.

As an example, in America a growth driver over the next few years will be the proliferation of side curtain airbags. There’s about a 35% penetration now, and it should hit about 100% in 2010. There are compelling studies which show how these airbags help in rollovers and other types of head trauma. Rollovers constitute 2% of accidents yet cause over 30% of deaths.

We expect that the adoption of new safety technologies will add an additional 3% growth to the base rate of 2.5%. We think with some margin expansion, this company can grow earnings at a rate of 10% to 11%. Add that to the 2.5% yield and you have about a 13% return. At 13 times earnings, that makes this stock very cheap indeed.

What are the risks?

There are a few risks. Rising raw material costs could impact margins, although the company managed well in the last quarter. Foreign currency is also a risk, given that a lot of the business is conducted overseas. There’s also potential product liability issue given that they manufacture safety products. But we’re extremely comfortable with the risk/reward profile at these levels. I’d say it’s a good buy at the current price, and I’d be particularly aggressive if it dipped back into the 40s.