Volvo And Mack Platforms Will Reshape Truck And EV Markets

Key Takeaways

• Focus on new truck platforms and EV growth in key regions like North America, Europe, and China positions Volvo for long-term revenue improvement.
  
• Emphasis on high-margin service operations and effective cost controls may enhance net margins and earnings stability.
  
• Increased trade barriers and production challenges in North America, along with currency risks, may strain profitability and pressure earnings growth.

Catalysts

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

• The company is investing in new truck platforms and models, such as the Volvo VNL and VNR and Mack's new Pioneer, which could potentially improve market share and volume in North America over time. This is likely to positively affect revenue and earnings in the long term as these products gain traction.
  
• Volvo is prioritizing high-quality service operations and focusing on increasing service contract penetration, which could lead to sustainable revenue growth and better net margins due to the higher margin nature of services compared to vehicle sales.
  
• The increased order intake for electric vehicles, especially in Europe and China, highlights a growth opportunity in electrification. As the market for electric vehicles grows, Volvo’s investment in EVs may lead to a significant increase in future revenues and support better long-term margins.
  
• Strong market leadership in Europe, where Volvo Trucks reached a market share exceeding 20%, suggests potential for stable revenue growth in the region as demand recovers, supported by a robust position in battery electric trucks.
  
• Effective cost control measures, including volume flexibility and adjustment of production levels to minimize under-absorption, particularly in North America, are expected to improve operational efficiency and potentially lead to improved net margins and earnings stability.

AB Volvo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AB Volvo's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 9.5% in 3 years time.
• Analysts expect earnings to reach SEK 52.9 billion (and earnings per share of SEK 25.78) by about May 2028, up from SEK 46.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK59.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.6x on those 2028 earnings, up from 11.6x today. This future PE is lower than the current PE for the GB Machinery industry at 21.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.67%, as per the Simply Wall St company report.

AB Volvo Future Earnings Per Share Growth

Risks

• Increased trade barriers and tariffs, particularly in North America, may lead to higher costs and reduced demand, negatively impacting revenue and net margins.
  
• The under-absorption in production and additional costs associated with the new truck model changeover in North America could strain earnings and affect overall profitability.
  
• The decline in net sales and adjusted operating income, driven by lower volumes and negative product mix effects, could pressure earnings growth.
  
• Currency fluctuations, especially the strengthening of the SEK, present a risk of negatively impacting transaction costs, affecting net margins and earnings.
  
• The elevated uncertainty in global trade conditions and its impact on market forecasts, particularly the reduced expectations for North America, Brazil, and China's construction equipment market, could lead to volatile revenues and earnings forecasts.

Valuation

• The analysts have a consensus price target of SEK312.51 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 SEK370.0, and the most bearish reporting a price target of just SEK240.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK556.7 billion, earnings will come to SEK52.9 billion, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 6.7%.
• Given the current share price of SEK262.6, the analyst price target of SEK312.51 is 16.0% higher.
• 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.