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Volvo - margins on the rise

Volvo's net sales rose 11% to SEK140.8bn in the second quarter, reflecting growth in all business areas...

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Volvo's net sales rose 11% to SEK140.8bn in the second quarter, reflecting growth in all business areas and ignoring the effect of exchange rates. Net sales from all the group's different vehicles rose to SEK109.3, up from SEK92.2. Net sales from Services were up almost SEK5.0bn at SEK31.5bn.

Volvo said larger truck fleets are continuing to upgrade their vehicles, but smaller fleets have become more cautious, because of lower used truck prices and lower freight volumes. Total order intake fell 10% in the quarter.

Strong pricing and a favourable mix of products sold contributed to an increase in underlying operating margins from 11.6% to 15.4%, despite ongoing cost inflation. Underlying operating profit rose 58.1% to SEK21.7bn.

Volvo had net financial debt of SEK30.4 at the end of the period, up around SEK8.0bn.

Volvo shares fell 2.2% following the announcement.

View the latest Volvo share price and how to deal

Our view

Volvo Group is a truck and industrial equipment giant. There are millions of Volvo trucks, buses and machines rumbling around. Cost inflation has been the biggest concern of late, thanks to the group's exposure to material, labour and logistics costs.

But margins have come out swinging in the second quarter, helped in part by a more favourable mix of products being sold and strong pricing. This is helping offset chunkier cost obligations and reduced productivity efficiencies elsewhere.

Higher demand for construction equipment from mining companies has been particularly helpful during the first half of the year as a whole, as has continued strong demand from the core trucks business. But looking away from the medium-term economic noise, longer-term we admire the group's high barriers to entry. Volvo's manufacturing and supply chains are enormous helping to protect market share. Volvo has enviable visibility over demand. The order intake for trucks was well over 200,000 last year as customers replaced old trucks and expanded their fleets.

Volvo not only produces vehicles, but services them. A 24/7 global servicing support network is a serious asset. If your truckful of goods is stuck somewhere, you need to have faith it can get moving ASAP. That feeds into more reliable revenue. Services currently make up a small part of overall revenues, and is expected to increase to over 50% by 2030. We think this target is achievable.

The group's also benefiting from booming e-commerce (those extra online orders mean increased need for logistics). Volvo is also a leader in the electrification of heavy-duty vehicles, including trucks and buses. Volvo wants over 35% of its vehicle sales to be electric by 2030. We view being a front-runner of sustainable haulage a real plus point.

The steadier style of Volvo's revenue means it's able to pay dividends, supporting a 5.9% dividend yield. Please remember nothing is guaranteed. Overseas dividends can be subject to withholding tax which might not be reclaimable.

For all the positives, there are some things to monitor. Underlying demand has started to wane a little, with some customers becoming more cautious. This includes a 10% drop in truck orders, which is partly a result of Volvo actively managing its backlog, but it also shows a level of nervousness. This isn't a Volvo-specific problem and instead relates to the broad economic uncertainty. But this could become a more contracted decline before it gets better, and this could cause some knocks to the valuation.

We view Volvo as a steady-Eddie with longer-term growth potential. Operational progress has been outstanding, but the wider economic environment shouldn't be ignored.

Volvo key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 19th July 2023