Autoliv Also Feeling Headwinds

Autoliv Inc. (ALV) is witnessing positive earnings growth by shifting production to low-cost regions and increased safety needs. Shares in global markets are increasing. However, difficult conditions in North American and West European automotive markets, as well as pricing pressure from original equipment manufacturers (OEM), are undermining Autoliv's near-term prospects. Hence, we rate the stock a Hold with a target price of $34.50.

Autoliv is set to grow globally by entering into partnerships and making acquisitions while introducing new safety products and streamlining its operations to cut costs. The company has a 40% global market share in airbags. The European market share is 65% and the North American market share for airbags is 38%. For seat belts, market share in North America rose to 28%, in Europe to 62%. Airbag and seatbelt market share in Japan has increased to 16%.

At a time when car volumes are expected to remain flat/down in the U.S. and Europe, Autoliv is delivering solid results due to the trend towards greater safety content. Content per vehicle has been steadily growing, and now stands at $240 per vehicle (about 1% of the value of the average car). Content per vehicle is about $300 in North America and Europe, while it is only $80 in other areas of the world. If the rest of the world came up to North American levels, this could add $0.50 to EPS.

Fred's Deals with Pricing Pressures

Fred's, Inc. (FRED) reported solid second quarter results. Sales were up 5% year-over-year to $447 million with comp-store sales growth of 4.9%, and earnings per share of $0.10. The company previously announced its sales, and its EPS matched the consensus estimate. In addition, the management reiterated its guidance for fiscal 2008. The company expects to earn $0.72-$0.76 per share for fiscal year 2008 and $0.16-$0.18 per share in the third quarter.

However, Fred's stores target lower-income customers, and those customers tend to be affected to a greater degree by higher energy and food costs. Gas prices remain high, and food prices continue to climb. Elevated food and energy prices are taking a large bite out of what low income households take home every week. Fred's results will most likely be negatively impacted by further pricing pressures.

With its stock trading at 19.6x our fiscal 2008 EPS estimate and 17.0x our 2009 EPS estimate, Fred's has limited upside, in our view. Fred's P/E ratio is in-line with its peers. We think the stock looks fairly valued at current levels. All told, we maintain our Hold rating. Our target price is $15, or about 18x our fiscal 2009 EPS estimate.

IPC Holdings a Hold on Yield

We maintain our Hold rating on the shares of IPC Holdings Ltd. (IPCR). The company's operating earnings of $1.62 per share came in significantly ahead of our expectations.

The ongoing turbulence in the credit market had its impact on the investment portfolio. However, we note that there continues to be a number of medium severity catastrophe events around the globe, which could increase premium rates locally in 2008. Though the company has built a track record of strong underwriting results, while maintaining a strong balance sheet and ROE in the mid-teens since its inception, currently we think that the high volatility in its earnings stream based on its near mono-line business model will continue.

We are lowering our 2008 and 2009 earnings expectations to $4.93 per share and $4.55 per share, respectively, from $4.51 per share and $4.45 per share, previously. At the current price, IPC's shares trade at 6.3x our estimated 2008 EPS and 0.90x its book value of $34.48 per share as of June 30, 2008.