Autoliv, Inc. (ALV) just proved you can win the battle and still lose the war. The Swedish auto safety giant posted a strong fourth-quarter earnings beat and managed to claw back almost all its tariff costs, but investors took one look at the 2026 outlook and headed for the exits. Shares tumbled more than 7% in Friday's premarket session.

Here's the interesting part: the quarter itself looked pretty good. Autoliv reported adjusted earnings per share of $3.19, crushing the analyst consensus of $2.90. Revenue came in at $2.817 billion, ahead of the $2.772 billion Wall Street was expecting. Organic sales grew 4.2%, driven primarily by new product launches.

Strong Quarter, Squeezed Margins

CEO Mikael Bratt had plenty of good news to share. The company hit record sales for both the quarter and the full year, powered by explosive growth in India and with Chinese original equipment manufacturers. Sales to Chinese OEMs surged almost 40% in the quarter and 23% for the full year. The company also managed to cut headcount by roughly 900 employees year over year while boosting operating cash flow by 30% to a quarterly record of $544 million.

"We reached new record high sales for a quarter and a full year, driven mainly by strong growth in India and with Chinese OEMs," Bratt said. "Sales to COEMs grew by almost 40% in the quarter and by 23% for the full year. Our organic sales growth outperformed LVP in all regions in Q4. We recovered close to 100% of the tariff costs in Q4 and more than 80% for the full year."

The tariff recovery story is genuinely impressive. Autoliv essentially passed through nearly all the tariff costs imposed in 2025 to its customers, recouping close to 100% in the fourth quarter and over 80% for the full year. That's solid execution in a tough environment.

But here's where things get messy. Despite those wins, margins took a beating. Operating margin contracted to 11.3% from 13.5% a year earlier. Adjusted operating margin fell to 12% from 13.4%. Operating income dropped 9.6% to $319 million, while adjusted operating income declined 3.6% to $337 million, hurt by lower customer compensations and reduced engineering income. Even the tariff recovery diluted operating margins by about 15 basis points in the quarter and roughly 20 basis points for the full year.

Supply Chain Chaos Continues

The margin pressure stems from multiple sources. Supply chain volatility remains a persistent headache, with frequent last-minute changes in customer call-offs disrupting production efficiency and profitability. Those call-offs are still elevated versus pre-pandemic levels, which makes operational planning challenging. Autoliv expects some improvement in 2026, but tariff uncertainty looms as an ongoing risk.

Inflation pressures, particularly from labor and other operating costs, continued squeezing margins in the quarter, though less severely than a year earlier. The company offset most of those cost increases through price hikes and customer compensation. Raw material costs, at least, weren't a major factor in profitability this time around.

The company also warned that shifting geopolitical and trade conditions could create further volatility in costs, customer behavior, and future margin recovery. Translation: don't expect smooth sailing.

The Outlook Problem

Now we get to why the stock dropped. Autoliv guided for flat organic sales growth in fiscal 2026, implying revenue of roughly $10.8 billion. That's well below Wall Street's $11.18 billion estimate, and it comes after the company posted $10.82 billion in sales for fiscal 2025. So basically, no growth.

The company does expect about a 1% positive foreign exchange effect on net sales, and it projects operating cash flow of around $1.2 billion. But the adjusted operating margin guidance of 10.5% to 11.0% signals continued pressure.

To his credit, Bratt remained optimistic about the longer-term picture. "We have a solid foundation for continued attractive shareholder returns and a clear path towards our 12% adjusted operating margin target," he said.

The company exited the quarter with $604 million in cash and equivalents, and full-year operating cash flow hit a record $1,157 million. Total headcount as of December 31, 2025 decreased by around 900 employees, or 1.4%, compared to a year earlier.

So the fundamentals aren't terrible. But when you're guiding for flat growth after a year of margin compression, investors tend to look elsewhere. At $117.30 in premarket trading Friday, ALV shares were down 7.22%.