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Volvo - sales and profits rise despite inflation

Volvo's net sales rose 17% to SEK131.4bn in the first quarter, ignoring the effect of exchange rates.

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Volvo's net sales rose 17% to SEK131.4bn in the first quarter, ignoring the effect of exchange rates. The increase was driven by growth in all business areas and regions, with particularly strong growth coming from North America. Volvo delivered 61,531 trucks in the quarter, up from 55,588 last year. The net order intake was 60,040 vehicles. Demand for buses has continued to improve as travel increases after the pandemic.

Underlying operating profit came in at SEK18.4bn, up from SEK12.7bn. Growth was largely driven by the core Trucks business, as well as Construction Equipment, partially offset by higher material costs and approximately SEK2.0bn increase in research and development spending.

The group's Industrial Operations, which excludes the financial services business, had net cash of SEK77.7bn as at the end of March, excluding lease and pension obligations.

Looking ahead, CEO Martin Lundstedt said transport volumes and infrastructure activity has been "solid" in most areas. He highlighted the ongoing need for ageing fleets to be updated, which is a tailwind for Volvo. However, the group's also mindful of the difficult economic environment.

The shares fell 1.3% 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. That's held margins back.

That's why it was a relief to hear that the worst of these fears have been put to bed in the first quarter. Higher demand for construction equipment from mining companies has been particularly helpful on that front, 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. Fleet upgrades is something we continue to see as an ongoing source of growth.

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 6.2% dividend yield. Please remember nothing is guaranteed. Overseas dividends can be subject to withholding tax which might not be reclaimable.

For all the positives, it's important to remember that supply chains - although improved - are still tough, especially in North America. This increases the risk of further inflationary shocks, which could see the group's valuation shake.

We view Volvo as a steady-Eddie with longer-term growth potential. While we can't knock progress, the wider economic environment remains uncertain so ups and downs along the way can't be ruled out.

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: 20th April 2023