Supply Chain Issues And Electrification Delays Will Impact Future Revenue

Key Takeaways

• Supply chain issues and production delays in North America may hurt revenue growth due to declining truck deliveries.
  
• High R&D expenditures and delays in electrification adoption could compress margins and impact projected revenue growth.
  
• Strong product launches, pricing discipline, and R&D investments position AB Volvo for stable revenue and margin growth despite market challenges.

Catalysts

Manufactures and sells trucks, buses, construction equipment, and marine and industrial engines in Europe, the United States, Asia, Africa, and Oceania.

• The decline in truck deliveries, specifically in North America due to supply chain issues and production delays, is expected to negatively impact Volvo's revenue growth in the upcoming quarters.
  
• The increased investment in innovation, research, and development, along with high costs related to new product launches (e.g., the all-new VNL truck), could temporarily compress net margins.
  
• The delay in broad adoption of electric vehicles, compounded by current macroeconomic conditions, may slow down Volvo's anticipated growth in electrification, affecting future revenue projections.
  
• The postponement of the battery cell manufacturing project in Sweden could delay Volvo's competitive positioning and revenue growth in the electrification segment.
  
• The expected stabilization and adjustment in market forecasts for Europe and North America suggest potential revenue headwinds due to cyclical and market corrections, which could affect future earnings.

AB Volvo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AB Volvo's revenue will decrease by -0.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.6% today to 9.3% in 3 years time.
• Analysts expect earnings to reach SEK 49.1 billion (and earnings per share of SEK 25.41) by about December 2027, down from SEK 51.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2027 earnings, up from 11.2x today. This future PE is lower than the current PE for the GB Machinery industry at 24.4x.
• Analysts expect the number of shares outstanding to decline by 1.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.27%, as per the Simply Wall St company report.

AB Volvo Future Earnings Per Share Growth

Risks

• The successful launch and high customer interest in the all-new VNL truck in North America could lead to improved sales and margins, especially if the new model's enhanced fuel efficiency attracts buyers. (Revenue, Net Margins)
  
• Strong pricing discipline and the ability to maintain prices despite a softer market, alongside potential for value-based pricing with new product introductions, suggest that profit margins could be preserved or increased going forward. (Net Margins)
  
• Resilience in service sales, which grew by 4% year-over-year, contributes to stabilizing financial performance, indicating a steady stream of revenue regardless of fluctuations in new vehicle sales. (Revenue)
  
• A stable or improving market position in several key regions, including a solid performance in Europe with high market shares, suggests that the company could maintain or expand its revenue base despite market challenges. (Revenue)
  
• Continued investment in R&D and product innovation, such as developments in electrification and hybrid models, could enhance competitive positioning and long-term revenue growth if these technologies gain traction with customers. (Revenue, Earnings)

Valuation

• The analysts have a consensus price target of SEK 307.63 for AB Volvo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK 345.0, and the most bearish reporting a price target of just SEK 271.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SEK 531.0 billion, earnings will come to SEK 49.1 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 6.3%.
• Given the current share price of SEK 284.0, the analyst's price target of SEK 307.63 is 7.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.