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Volvo - sales flat as truck demand normalises

Volvo has reported flat sales as truck demand tapers.
Volvo - sales climb, but order intakes stall

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Volvo’s first quarter net sales were on the same level as last year, coming in at SEK131.2bn. This included flat sales in the important truck business. The group saw a 10% reduction in truck deliveries in the quarter and the order intake fell by 19%. The group expects production to be scaled back in-line with these changes by the end of the second quarter.

Underlying operating profit fell to SEK18.2bn from SEK18.6bn last year, including a SEK840mn increase in research and development spending. Operating cash flow was SEK4.9bn, compared to an outflow last year. This includes the acquisition of a battery business from Proterra Inc, and an investment in a logistics electric vehicle joint venture with Renault Group and CMA CGM Group. Net debt stood at SEK34.1bn as at the end of the period.

CEO Martin Lundstedt said the group would continue to focus on “volume flexibility” and “tight cost control”.

The shares rose 2.3% following the announcement.

Our view

Volvo Group is a truck and industrial equipment giant. There are millions of Volvo trucks, buses and machines rumbling around.

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 its ability to pay dividends, currently offering a prospective 6.0% 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.

But it’s important to recognise 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 severe slowdown, we can't rule out cuts to the dividend, but this would be a drastic measure.

The group is doing a reasonable job at flexing its production capacity to meet lower demand, which is the right move to protect the bottom line. But broader cost cutting is also on the agenda. Trimming fat is no bad thing, but this is something we’ll be keeping an eye on. If cuts look drastic, or very deep, it can trigger questions about whether enough is being spent to fund Volvo’s ambitious electric targets.

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

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: 17th April 2024