Iveco Group: Still Waiting For This Game-Changing Catalyst

seekingalpha08-15

Two years have passed since Iveco's spin-off from CNH Industrial.Iveco Group is a large truck manufacturer in Europe but has not been as successful as similar peers in improving margins.With Iveco's ...

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Though promising, this spin-off has turned out to be less effective than those of two similar European peers: Traton (OTCPK:TRATF) and Daimler Truck (OTCPK:DTRUY). In fact, while all three companies started their standalone path with low single-digit margins, Iveco has not been able to improve as much as the others, even though market conditions were extremely favorable until the end of last year. Now that demand is softening, Iveco pays once again the price of being an interesting company, but without the global scale needed to compete successfully in this capital-intensive manufacturing business. Additionally, the company partnered with Nikola (NKLA) to catch up with its peers on the electrification journey. We all know what Nikola did, and it was no surprise Iveco was forced to part ways with this company. This is why I have been bearish on the company based on its fundamentals and - more importantly - on the other options available in the industry (Volvo Group and Paccar are my two top picks). But I have also advocated that Iveco seems to be a possible M&A play that could be acquired by a larger peer needing to strengthen its business in Europe and South America. Surely, Paccar (PCAR) and The Volvo Group (OTCPK:VLVLY, OTCPK:VOLAF) could pull the trigger. A few weeks ago, Iveco reported its H1 2024 results and the stock plummeted over 20% since then, trading once again below its IPO price. As I have said, Iveco has been a money-making machine only for those who were able to buy it at its 2022 lows. But this looks more like a swing trade than a true long-term investment. Iveco's Q2 2024 Financial Highlights Revenues were down 5% to €3.9 billion, while the industrial EBIT margin was 6.9%. Industrial FCF came in negative by almost €100 million, a €233 million decrease YoY. For the first half of the year, industrial FCF is -€534 million, a €123 million decrease YoY. Iveco Q2 2024 Presentation The company's EPS increased by €0.02 and Iveco still has over €4.2 billion in available liquidity, meaning it won't run out of business anytime soon. However, we have to brace for impact since the market is not done slowing. Europe, in particular, where Iveco concentrates 74% of its revenues, is soft and down 8% YoY. South America also did poorly: -1%. To put this into the right context, other peers such as The Volvo Group reported strong order book growth in this continent. Iveco Q2 2024 Presentation The revenue breakdown by region and by business unit shown above helps us understand why I have been saying Iveco has a concentration risk other peers don't have. It mainly relies on sales of trucks in Europe. Actually, the real profit-making division is light commercial vehicles in Europe. This is why it could be a perfect match for larger companies, but, in itself, Iveco lacks the scale to compete worldwide. While Iveco's Q2 deliveries were still rather high, orders were down in the two most important business segments: light commercial vehicles and medium and heavy duty. Buses are doing a bit better, but it is a business division that has a low impact on the overall results. Iveco Q2 2024 Presentation To better understand what is happening, let's look at the Q2 2024 book-to-bill tables that Iveco shared: Iveco Q2 2024 Presentation Trucks in Europe - the most important category for the company - is down 12% with LCVs down 16% YoY. South America is seeing positive momentum for LCVs but softness in M&H and buses. The result of the whole group is the following: trucks is down 6% YoY, with LCV decreasing by 13%. Not a good situation for Iveco's profitability. The outlook Iveco gave for the full year doesn't look encouraging: LCVs should report low-single-digits volume growth in Europe, while they are expected to be flat everywhere else. Medium and heavy-duty is going to be down 15% in Europe. Buses should more or less be flat all around the globe (for Iveco, this means Europe, South America, Russia, Turkey, Southeast Asia, Australia, and New Zealand). As a result, Iveco expects its revenues to be down 4% YoY, but to be industrial FCF positive, with at least €350 million generated in the fiscal year. However, Iveco also said it lacks Q4 visibility, and it expects the new product rollout to help a pickup in order intake by year-end. These could turn out to be bold assumptions down the road. In addition, pricing should be lower in H2 2024 to help sales. This puts at risk the industrial FCF goal. During the earnings call, an analyst asked the company's new CEO Olof Persson if he was considering M&A deals, but his answer was vague: \"I am not against M&A\" while reminding him that Iveco has a partner strategy that has been laid out. So, for now, we have to keep waiting for this catalyst to happen. With Iveco's stock price being once again hammered down, a favorable situation could open up for potential bidders. I, personally, am not aware of any upcoming deal, though I see a favorable window opening up while the company is cheap and faces some temporary challenges. Iveco currently trades at a 10 PE ratio and its P/FCF yield is almost 15% if the company will be able to generate €350 million in FCF. Considering Iveco's situation and its weak growth forecast, I think we are before a stock that could be a bit of a value trap, alluring investors with its low PE and high FCF yield, without many being aware that these low multiples are justified by the harsh environment Iveco has to face. All in all, I rate the stock as a hold. This means there is no ripe time to buy unless one is sure a takeover bid for the company could soon show up. Otherwise, better stay away from this one and look at its largest and most profitable peers for more reasonable buys.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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