Volvo’s third-quarter net sales fell 7% to SEK 117.0bn (Swedish Kroner), ignoring currency impacts. An 11% decline in Vehicle sales was partly offset by 4% higher Service sales.
Underlying operating profit fell more than markets expected, down 26.9% to SEK 14.1bn. This was driven by lower volumes and an unfavourable product mix which more than offset higher sales prices and easing material costs.
Free cash flow improved from an outflow of SEK 1.5bn to an inflow of SEK 5.2bn, largely due to favourable timing of payments from customers. Net debt at period-end was SEK 173.9bn.
CEO Martin Lundstedt referred to some macroeconomic “uncertainty” in the near term. He also pointed out that the industry is poised for long-term growth and Volvo is in a good position to support customers.
The shares fell 1.6% in early trading.
Our view
Volvo’s third-quarter numbers showed it’s not firing on all cylinders after global freight and construction activity normalised from the heights of last year. The group’s getting some relief from high demand in its buses division, but it wasn’t enough to keep group profits from falling sharply this quarter.
It’s worth pointing out that this isn’t the car maker – that part was sold off a while ago. This Volvo is an industrial giant that manufactures trucks, buses, diesel engines, and construction equipment.
The group not only produces these vehicles but also services them. If your truckload of goods gets stuck somewhere, a 24/7 global servicing support network is on hand to get you up and running ASAP. It’s a win-win situation. Customers get peace of mind, and Volvo gets a reliable recurring revenue stream to help smooth out the ups and downs of economic cycles.
That’s proving to be a big benefit, as recent vehicle sales have pulled back overall. With the current level of macroeconomic uncertainty, end-markets are expected to remain subdued this year. Given Volvo’s exposure to global economic activity, we can’t rule out things getting worse before they get better.
While truck orders may have stalled, there’s been a small bounce in orders for buses and construction equipment. These take some time to convert into sales, but the latter can often be seen as a leading indicator of where the economy’s heading. Companies only tend to order construction equipment if they’re confident that more work is on the horizon. We’re hopeful that momentum can build further, but remember, nothing is guaranteed.
Looking further out, transportation and infrastructure are vital and exciting industries with long-term growth drivers, and we think Volvo’s in a good position to meet this demand. There are significant barriers to entry in this field as well. The group's vast manufacturing and supply chains play a crucial role in safeguarding its market share.
It’s also a leader in the electrification of trucks and buses. Volvo wants over 35% of its vehicle sales to be electric by 2030, but that target looks increasingly challenging.
The balance sheet remains in good shape, and there’s currently a prospective 5.9% dividend yield on offer. Please remember nothing is guaranteed. Overseas dividends can be subject to withholding tax which might not be reclaimable.
The valuation’s sitting below the long-term average, reflecting the slowdown in activity. There’s no telling when things will pick up, but in the long term, we see growth potential at Volvo. Ups and downs along the way can’t be ruled out.
Environmental, social and governance (ESG) risk
General Industrial companies are medium risk in terms of ESG but can trend up to the higher end of the spectrum depending on subindustry. The primary risks can include labour relations, emissions (either product or production-based), business ethics and product governance. Other concerns are waste and health & safety.
According to Sustainalytics, Volvo’s management of ESG risk is strong.
Volvo is addressing its substantial risks related to greenhouse gas emissions by investing in electric and hybrid vehicle technology. The group has also committed to net zero emissions by 2040. However, Volvo is facing consumer lawsuits throughout Europe relating to its previous involvement in a price-fixing scheme in the region.
Volvo key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
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