⏩ Speedy thesis #2: ALV, ARJO, ACO.X
Ideas that pay a dividend while you wait for capital appreciation
This is the second edition of Speedy thesis. Let’s make it a habit. 🔥
Speedy thesis works as a starting point for investment research: presenting potential opportunities and helping readers to select companies and stocks fitting into their own (dividend investment) strategy and portfolio.
This issue covers three companies starting with a letter A.
A) Autoliv - airbags and seatbelts. Dividend 3,3%.
B) Arjo - hospital beds, patient handling. Dividend 2,8%.
C) Atco - owns majority in Canadian Utility. Dividend 4,3%.
Although it’s a triple-A list most of the stocks are not neccessarily in the buy zone right now. Let’s have a look:
A | Autoliv ($ALV) 🇺🇸/🇸🇪
🔑 TSR case, underlying industry growth, investing together with an activist
The market leader in passive safety systems for passenger cars, i.e. airbags and seatbelts. According to the company they have 43% market share.
Thesis 💡
Due to the challenges with supply chain and cost increases of material, the sales and earnings have been (temporarily) depressed. Now, the company has been able to implement price increases and the sales are recovering while the auto industry is working through the order backlog.
The growth of Autoliv is not fully linear with the passenger vehicle sales, its addressable market also grows as regulators increase the requirements for safety equipment in cars. Here, the emerging markets are following the trend in the developed markets.
The company has returned to reward its shareholders with dividends and buybacks. A major shareholder is Cevian Capital, a famous Swedish active investor.
My conclusion: Alhtough the forward P/E is somewhere around 12-13, at the current share price the R/R is not good enough, but around $70 I’m interested in starting a small position. A company definitely worth adding to a watchlist. My guesstimate of the numbers for following years are:
Average analyst target price: $90.2.
Pros
Well managed company and healthy balance sheet, positioning itself as a cash cow after spinning off Veoneer?
Major Swedish bank Svenska Handelsbanken recently pointed out that the market is underestimating the long-term potential and structural growth, and sees 50% upside in three years horizon.
Cons
Very cyclical industry, limited pricing power, needs to refinance most of its debt within three years.
Here’s my Seeking Alpha write-up about Autoliv.
B | Arjo ($ARJO-B) 🇸🇪
🔑 theme/industry play (healthcare equipment), aging population megatrend
Arjo is a producer of hospital beds, patient handling and hygiene equipment.
The company is controlled by a Swedish billionaire businessman Carl Bennett.
As mentioned in the previous Speedy thesis, healthcare equipment manufacturers have performed well in the type of market environment we are now living in or about to enter.
Thesis 💡
Arjo is expecting a 20% increase of costs. But what if this is not going to happen if and when inflation is moderating and prices have come down after a major spike? Very weak Swedish krona could add to the opportunity.
Pros
Majority owner driving the company, low debt level, since its independent journey, (2017) as a listed company the company has grown sales 3.6% and EBITDA 13.6%.
Cons
Premium valuation which is not correlated in capital returns?
I wrote an introduction in Finnish covering Arjo and Elekta, another Swedish healthcare equipment manufacturer, on Salkunrakentaja. I think Arjo represents a better opportunity in the sector in terms of valuation, historical track record and future prospects.
Share price: 40.3 SEK. Average analyst target price 48 SEK.
C | Atco ($ACO.X) 🇨🇦
🔑 dividend growth stock, sum of the parts, portfolio stabilizer
Atco is a Canadian dividend stock and a holding company. Atco owns 53% of a company called Canadian Utility ($CU). In addition it has couple of other types of businesses: shipping ports (40% ownership) and provides rental services of modular and transferable spaces. The two latter ones bring in 17% of adjusted earnings.
Thesis 💡
Here’s an overview of Atco written by the pseydonym Trapping Value. The thesis comes down to the excellent dividend growth record, stability and downside protection by sum of the parts:
“So the kicker here is that ATCO's current market capitalization is less than even the directly held stake in CU. At about 53% of the $10 billion market capitalization of CU, ATCO should be worth at least $5.3 billion. Instead, it is worth about $4.85 billion.”
On top of the CU stake comes two small business units. However, one must note that Canadian Utilities is not particularly cheap trading at P/E 17 according to Trading View.
Pros
Impressive dividend track record, stability of a regulated business, growth in other businesses.
Cons
According to QuickFS the company has a rather poor returns on capital and the earnings per share haven’t grown.
I’ve been trading couple of times in and out of Atco. Currently I’m in collecting the dividend but might exit the position with a small (~10%) gain.
Excellent book summary
In the previous Speedy thesis I shared a tweet listing the best and worst performing stock markets. South-Korea was one of the worts performing markets with -27% decline for 2022. I intend to cover Korean banks in the following weeks. Stay tuned.
Recently published:
Story of Adolf Lundin and introduction to his stock-listed companies in commodities sector.
I elaborated on Levi Strauss, one of the stocks on the previous Speedy thesis edition, on Seeking Alpha.
My twitter handles
English: @paidwait
Finnish: @anttisleinonen
The picture on the top of the post was made by Stable Diffusion AI.