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Volvo - sales climb, but order intakes stall

Volvo's fourth-quarter sales rose by 8% to SEK148.1bn, ignoring the effect of exchange rates.

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Volvo's fourth-quarter sales rose by 8% to SEK148.1bn, ignoring the effect of exchange rates. This was largely driven by price hikes, which led to a 23% uplift in European sales. Deliveries of new trucks increased by 4% to a fourth-quarter record of 65,625.

Underlying operating income jumped from SEK12.2bn to SEK18.4bn. Despite supply chain issues and higher costs, underlying operating margins climbed from 9.1% to 12.4%.

The group's truck order intake fell 9%, reflecting a normalisation of demand and a relatively "weaker macroeconomy". Orders in the Construction Equipment business were also negatively impacted by lower demand from China.

Free cash flow rose from SEK8.6bn to SEK10.3bn, and net debt was SEK56.4bn at year-end.

The shares fell 2.7% 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.

The essential nature of Volvo's products helped sales rise in the fourth quarter, and profitability continued to move in the right direction following a reduction in cost inflation.

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 that it can get moving again ASAP. That feeds into more reliable revenue. Services currently make up a small part of overall revenue and are expected to increase to over 50% by 2030. We think this target is achievable.

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.

The group's also benefiting from growing 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 as a real plus point.

The steadier style of Volvo's revenue helps its ability to pay dividends, currently offering a prospective 4.7% 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, relating to Volvo's large exposure to global economic activity. Underlying demand has been waning, with some customers becoming more cautious. This includes a high single-digit drop in truck orders, which is partly a result of Volvo actively managing its backlog, but it also shows a level of nervousness and economic weakness.

This isn't a Volvo-specific problem and instead relates to the broad economic uncertainty, especially in the Chinese property sector. Volvo is forecasting a large uptick in truck registrations in China this year, suggesting conditions here could be set to improve. But there are a lot of moving parts, so this picture could change quickly.

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 and 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.

Overseas dividends can be subject to withholding tax which may not be reclaimable.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 26th January 2024