market folly

We're posting notes from the Sohn London investment conference 2016.  Next up is Erik Karlsson of Bodenholm Capital who pitched two long ideas: Autoliv and then Philips.


Erik Karlsson's Sohn London Conference Presentation

Before co-founding Bodenholm in 2015, Erik Karlsson was a partner and senior analyst at AKO Capital, 2007-2015. 

Long Autoliv 

Autoliv is the global leader in seat belts and airbags with 38% market share. It has grown organically by an average of 4% for the last 10 years and has had a stable EBIT margin of 8-10% most years. It returns 90% of its FCF through dividends and buybacks. The market values Autoliv at 13x next year’s earnings.

Autoliv will gain market share because its main competitor, Takata, has had product failures that led to accidents and the largest auto recall in US history. Since those events two years ago Autoliv has won 55% of all new orders. There is a long lead time in the industry so Autoliv will only get paid 3 years on but the sales are guaranteed. EBIT margin will expand from 8% to 11% by 2019.

They have too much cash on their balance sheet and could buyback more stock. Takata is up for sale and Autoliv could launch a takeover of Takata or a part of it. Buying a distressed company could be risky but management is conservative and have a good acquisitions track record. Takata are forced sellers so Autoliv could strike a good deal.

Good things can happen to the stock if the company experiences growth in net income and PE expansion. With Takata sidelined, Autoliv may be able to increase prices.

To lose money on the Autoliv investment, sales would have to decline 5% and the stock would have to de-rate to 11x EPS. If that happens it would lead to a 10% loss in the investment over the next year. 



Long Philips (AEX: PHIA) 

Philips has become a better and smaller business. It is only half the size it was 18 years ago. It has been divesting its electronics businesses and becoming more focused on health. There are 4 parts to the business:

- Personal health: e.g., razors

- Health technology: dialysis technology

- Diagnostic treatment: medical equipment

- Connected care

It is achieving higher and more stable organic growth. New Philips is growing at about 4% per year. Margins will improve, FCF will improve. Margins are particularly good in personal health. The company has nearly finished restructuring. Once it has divested its lighting business that is separately listed it will be able to move into a net cash position by 2018.

The company is getting better at capital allocation. It has increased buybacks and dividends and returned Euro 8 billion since 2011 or 38% of its average market cap. Few companies in Europe achieve that. It may lever up a bit to 1.5x net debt in the future. Philips could become the ‘European Medtech.’

To lose money on an investment in Philips revenues would have to decline 2%, margins would have to fall to half the company predicts and the stock would have to de-rate to 13x cashflow.

Be sure to check out the rest of the Sohn London conference presentations here.