Volvo: Why I Am Mostly Out Of This Industrial, And Have Been For Some Time

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Volvo AB, a leading truck and machinery manufacturer, is currently overvalued at 270 SEK/share, making it a "Hold" with a target price of 255 SEK/share.VLVLY has strong fundamentals, an excellent ...

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The company, like other trucking and machinery/bus companies, offers a selection of trucks, buses, and construction equipment, but also some very attractive equipment for things like Marine sectors, industrial applications, and other fields. Volvo AB IR Volvo AB is an A-rated construction machinery and trucking company - and it's one of the very few companies in this sector that merits an A-rating. It has a market cap of 430B SEK or around $45B, it yields between 4-7% over time and tends to more often than not beat estimates, instead of underperforming them. . The company has averaged, over time, a 12.25% EPS growth rate on an adjusted basis. This growth rate has not come in a stable manner. Like any industrial business, the company is choppy. During the GFC, the company's EPS went deeply negative, and 2020 after COVID-19 saw similar trends. But overall, and lon","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"VOLAF":"Volvo AB","VOLVF":"Volvo AB","BK4149":"建筑机械与重型卡车","VLVLY":"Volvo AB"},"translate_title":"沃尔沃：为什么我大部分时间都不在这个行业，而且已经有一段时间了","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"VLVLY":0.9,"VOLAF":0.9,"VOLVF":0.9},"content_text":"Volvo AB, a leading truck and machinery manufacturer, is currently overvalued at 270 SEK/share, making it a \"Hold\" with a target price of 255 SEK/share.VLVLY has strong fundamentals, an excellent credit rating, and significant upside potential if bought at a lower valuation.Recent Q3 2024 results show negative sales growth and declining margins, indicating a downcycle trend and justifying the current \"Hold\" rating.Despite its volatility, Volvo's long-term performance and dividend yield make it an attractive investment at a more conservative valuation.Trygve Finkelsen/iStock Editorial via Getty Images Dear readers/followers, Now, to be clear - this review is not about Volvo Cars AB, the car company, but about Volvo AB (OTCPK:VOLAF) (OTCPK:VLVLY), the truck manufacturer. This is one of the major Swedish industrial and truck businesses out there, and it's a company that I, as of yet, have not reviewed on Seeing Alpha. It is time as of this time to change this. In this article, I will provide an introductory view on Volvo and where this company might go from here. I have been invested in Volvo AB previously - but since about a year ago, I'm mostly out of the company for reasons of valuation - and I will go into these reasons in this article. That being said, since I sold my position in the company in early 2022, the company valuation has normalized - and it's now at a valuation that cannot be argued to be all that expensive anymore. However, I have reinvested most of that capital into competitors at a more attractive valuation. In this article, I will show you what the upside for Volvo AB could be if the valuation were to normalize, and what could be your overall upside. Construction equipment, trucking, and machinery, which is what Volvo is into, is a very attractive play. That's why my positions in companies like KION (OTCPK:KIGRY), and Daimler Truck (OTCPK:DTRUY) are non-trivial - and why I am happy I own them because they are up significantly. So what upside does Volvo have? Volvo - The upside and what the company does Volvo is an interesting business. The company, like other trucking and machinery/bus companies, offers a selection of trucks, buses, and construction equipment, but also some very attractive equipment for things like Marine sectors, industrial applications, and other fields. Volvo AB IR Volvo AB is an A-rated construction machinery and trucking company - and it's one of the very few companies in this sector that merits an A-rating. It has a market cap of 430B SEK or around $45B, it yields between 4-7% over time and tends to more often than not beat estimates, instead of underperforming them. (Source: FAST Graphs, Paywalled link). The company has averaged, over time, a 12.25% EPS growth rate on an adjusted basis. This growth rate has not come in a stable manner. Like any industrial business, the company is choppy. During the GFC, the company's EPS went deeply negative, and 2020 after COVID-19 saw similar trends. But overall, and long-term investors have done very well for themselves by putting money to work in Volvo AB. If you had invested in Volvo in 2004, your RoR annualized here would be 11.66%. And with some valuation consideration, it could easily be twice that. So, Volvo is a good company - but a volatile one. And the volatility is something we see in the company's current trends. However, the company's sales mix, to stay on the fundamental side of things, is fairly EU-heavy. 43% of sales are in the EU, with NA at 30% and APAC at 12%. The remaining sectors, such as SA and Africa/Oceania, make up only 15% together. Like many other companies in its field, the company has been focusing on smoothing out the volatility of its earnings and the cycles it goes through, while at the same time maintaining disciplined capital allocation and investments in new business models and technologies. The company has applied a new common architecture across its various fields. Volvo AB IR If you're uncertain of what Penta is, its engines among other things for maritime applications - and without exaggerating, Penta engines are probably some of the more stable ones for the applications where they are found. But while Penta is great, the truck operations are what drive industrial synergies across its various business areas. Volvo AB IR And the work the company has been doing has improved things markedly. The best indicator for this is the evolution of the group's operating income and margin. The company's operating income margin has moved from a 2.6% in 2013, following the GFC, troughing during COVID-19, only to move to a full 13.7% as things are looking now. The company has also introduced a significant improvement in Volvo service sales. In the meantime, more than doubling the volume of service sales in less than 9 years. ROCE has also been improving, and the company's financial situation is stable. Volvo AB IR Volvo's common and obvious correlations are a few. First of all, industrial and economic macro. When construction lags, so does Volvo. I believe this is part of the reason we're seeing the drop we're seeing. The markets for both trucks and construction equipment have been in recovery since the GFC but have moved down again for the past half-year or so - especially in Europe, NA, and China. China especially is showing a worrying trend, after peaking between 16-21. Volvo AB IR Aside from correlation to macro and geopolitical factors, I also tend to look at market share evolution, and in terms of the company's market share, Volvo is doubling the market share of Renault in Europe, almost doubling Mack in the US, and more than tripling in Australia. The company's current targets are fossil-free technologies taking over until 2040. A lofty goal, and one I'm not certain the company can actually manage, but one we shall be looking at until then. Volvo AB IR The advantage we see here is the working together of the company's modular architecture, which enables Volvo to work through a host of different applications and products using similar technologies. Construction equipment is especially interesting to me, given the demands on battery technology when it comes to these sorts of applications. Volvo is also very clear on the matter that it doesn't control the adoption of these technologies, and it requires multiple things going \"hand in hand\" here. But the company is well-prepared for this. And the market's evolution of the view regarding the company's credit rating is also fairly clear here - in that since the GFC, Volvo has become one of the best-rated companies in the entire CE/Trucking/Bus field. Even better than Daimler at this particular point in time. Volvo Group AB IR Volvo trades in a group where I would put it not necessarily with Daimler as the main peer, but more along the likes of Caterpillar (CAT) and PACCAR (PCAR). Both of these companies are companies that I once invested in, or have invested in, or still own. But Volvo is by far one of the more interesting of them. It's also the company out of the 3, that up until this point has performed the best - yes, even better than Caterpillar in terms of total returns since 2015. (Source) That is worth mentioning here. The only company that has actually performed better, and it's not Traton, is Daimler Trucking (again, which is the one I own here), and that outperformance has only come as of late. Volvo's dividend also deserves mentioning here, and not in a positive way. The company's dividend level is low - less than 2.5% at this time. It's also only once a year - but Volvo does deliver some bonus dividends that usually boost this quite a bit. For this year, Volvo's dividend inclusive of the bonus was upwards of 6.6%- but it's never easy to tell if there's just going to be a standard dividend, or an extraordinary one as well. The latest set of results we have are 3Q24, and they're very fresh. During this quarter, Volvo saw negative sales growth, down 5.7B, with adjusted operating income down to 14.1B SEK, with margins dropping 240 bps on the operating EBT level. OCF was down, net cash was down, and only ROCE was up. EPS dropped to close to 5 SEK, down 2 SEK, or over 15%. Volvo AB IR In short, Volvo is showing all the signs of a manufacturer in the midst of a downcycle trend, which is also the reason why I sold the company in the first place. It was too expensive for that. The electrification progress has stalled. Deliveries are down, and order intake for this is flat. On the group level, trucks are down 9%, CE is down 24%, Penta levels are down 3%, and only buses, the smaller segment, is up 23%, not able to save the company here. The service segment remains positive, with sales and results up in every segment, and this is positive. But it still means that the valuation for the company is dictated by the near term, and the cycle here is not a positive one. Volvo's Valuation - not all that attractive here, especially if we expect the company to underperform in 2-3 years Volvo is undoubtedly an attractive business - the company's fundamentals are second to very few in this sector. All we require is for the investment to be made at an attractive price and valuation, and to make sure that our returns based on this meet that hurdle. A few problems with that notion as it stands today. As of right now, the expected returns for the company are close to zero for 2024-2025 - and this is mostly confirmed by 2024 Q3 results, which were poor. The company is expected to generate double digits in 2026E when this turns around, but I remind you that these forecasts have a high, 40%+ chance, of not being accurate. Because of this, I do not think that Volvo currently presents an attractive thesis. Because removing this 11% growth in 2026E, the conservative RoR at 11-12x P/E goes below 7% per year, even with the dividend included. I'm willing to give Volvo the benefit of the doubt here due to high historical growth rates, but I would still require the company to generate 15% annualized based on a more conservative set of forecasts. This means that we cannot buy at 270 SEK; ergo, the company is currently overvalued, and the price needs to be lower. I put my own introductory share price at a native 255 SEK share price target. At that target, even with the company's 1-2% growth and a 50% discounted growth rate in 2026E, we have Volvo generating upwards of 13-16% conservatively - this would be good enough for me. S&P Global analysts are more positive than I am. Their lowest target is 263 SEK, with a high end of 380 SEK - and I don't even understand how they can get that one to work. The ratings do reflect a much more conservative estimate. Out of 19, only 7 are at \"Buy\", while 10 are at \"Hold\", one person is at \"Sell\", and the others mixed. In the end, I believe Volvo is too expensive for what the market currently expects out of the company. Consequently, I say that this company cannot be bought profitably here, and my introductory thesis for Volvo comes to a \"Hold\" with a PT of 255 SEK. Thesis  Volvo is one of the world-leading companies in the trucking field, CE, buses, and other machine and industrial applications. It has an excellent credit rating, a good upside at a conservative valuation, and owns some of the more appealing brands of trucks and CE in NA and EU. Based on this, when the price is good, this company becomes a \"Buy\". The company has an upside only if you allow for it to trade above a valuation based on historical averages that have not held for an extended period of time. However, after the drop since early 2024, the company is now far more attractive than it once was - and I'm willing to increase my PT for the company to 255 SEK/share. Based on a 255 SEK/share target, Volvo's upside is close to 15-16% and based only on an 11-12x P/E and a yield, inclusive of the typical bonus, of over 5%. And I consider this to be a fairly attractive sort of return. However, as of 270 SEK/share, which is what we have now for the native, I say that Volvo is a \"Hold\" and would start by being neutral here.  Here are my criteria and how the company fulfills them (italicized).  This company is overall qualitative. This company is fundamentally safe/conservative & well-run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.  The company fulfills 3 out of 3 quality indicators, but 0 out of 2 valuation indicators. Based on this, and a valuation target of $85/share where I see a risk/reward-adjusted upside that's attractive enough for me, I give the company a \"Hold\" rating as of October 2024.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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