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Volvo - sales up 9% but outlook unclear

Third quarter sales rose 9% to SEK132.4bn, ignoring the effect of exchange rates...

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Third quarter sales rose 9% to SEK132.4bn, ignoring the effect of exchange rates. Underlying operating income was SEK19.1bn, up from SEK11.9bn. Despite supply chain issues and higher costs, underlying operating margins rose more than four perecentage points to 14.4%.

The group's truck order intake fell 27% and truck markets are forecast to be lower next year. This partly reflects more cautious behaviour from smaller fleets. There has also been a downturn in the Construction Equipment business, because of weaker macroeconomic environments across Europe and reduced construction in China.

The group generated free cash outflow of SEK0.4bn, down from an inflow of SEK12.8bn and there was net debt of SEK30.7bn as at the end of period.

The shares rose 1.8% 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 is helping sales rise nicely and profitability's also moving in the right direction following a reduction in cost inflation. Recent results were better than expected too.

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. We're pleased to see momentum in this area's continued in the first half.

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 a real plus point.

The steadier style of Volvo's revenue helps it's ability to pay dividends, currently offering a prospective 5.1% 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 is waning, with some customers becoming more cautious. This includes a double 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. But this could become a more contracted decline before it gets better, and this could cause some knocks to the valuation. In the case of a worse than expected slowdown, we can't rule out cuts to the dividend but this would be a drastic measure.

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.

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: 18th October 2023