Volvo Business as Safe and Solid as the Vehicles

Volvo, with its reputation for safety over style, might be the butt of endless jokes usually involving soccer moms, but it remains the world's second largest truck maker and it is expecting to have a solid 2012. According to Bloomberg, Volvo stuck to its estimates for the North American and European heavy-vehicles markets for 2012 thanks to sales growth which helped fourth-quarter operating profit increase 26 percent. Volvo is expected to sell 220,000 trucks in Europe and 250,000 in North America industry-wide in 2012, the Swedish manufacturer said in a statement. 4Q earnings before interest and taxes rose to $6.96 billion kronor ($1.03 billion), from the previous year's 5.52 billion. CEO Olof Persson only took the position on September 1. He had previously managed the company's construction-equipment business, and he is now looking to shift focus to profitability from sales growth. “Right now, we have a good balance between production and demand throughout the system, including in the Europe or U.S.,” Persson said to Bloomberg. “We see now that we can handle upturns and downturns in a pretty good way.” Morten Imsgard, an analyst at Sydbank A/S in Denmark, said to Bloomberg that Volvo has “a diversified portfolio of products and geographic sales mix that will help them be one of the winners in the truck and construction industries in 2012.” The market has certainly reacted to what, with no pun intended, looks like being an extremely safe and solid month for Volvo. Some things never change. Volvo rose up to 2.2 percent to 92.75 kronor and was trading up 1.6 percent at 1:05 in Stockholm, according to Bloomberg, Persson maintains that Volvo does not intend to cut production or jobs despite not extending the contracts for hundreds of temporary workers in Sweden. Volvo also saw its 4Q net income shoot up 46 percent to 4.72 billion kronor while full-year profit rose 63 percent to 17.8 billion kronor with sales gaining 17 percent to 310 billion kronor. Operating profit rose 49 percent to 26.9 billion kronor. Those are impressive figures for a company considered one of the least fashionable in auto manufacture. Persson's old stomping ground, Volvo's construction-equipment division, didn't do so well, with Bloomberg reporting that operating profit, “fell 6.2 percent in the quarter to 1.65 billion kronor. China's construction market contracted 13 percent from September through November, in contrast to a 9 percent global expansion, driven by measures the country's government took to curb inflation, Volvo said. Earnings at the aero division, which makes plane engines, fell 46 percent to 151 million kronor as sales increased 1.1 percent to 1.87 billion kronor. Efforts to dispose of the unit are “continuing,” Persson said, declining to give details.” On Friday, J.P. Morgan published a report stating that, “Volvo reported clean operating profit some 5% below JPMe and Street estimates after taking out the Japanese write-downs and R&D tax credits. The2012 outlook was reaffirmed (apart from VCE China) implying industrial sales at around SKR310bn (vs JPMe SKr290bn) due to a strong VCE and Brazilian Truck outlook. We believe the strong outlook, indicating a stabilization in European truck orders and potential restructuring benefit should bode well for Volvo going forward and will outweigh the relatively small miss in earnings today.” Collins Stewart added in a report that, “Our Quest modeller based price target of SEK 105 remains, over 15% above today's price that is itself already 30% up on late 2011 levels. On EV/Sales mean reversion, the relatively cautious assumption of 0.8x based on 8% margins crosscycle as achieved in Q4 (and vs. the 10% level targeted), implies over 20% upside to the current SEK 90 share price. Longer term, if the company achieves and sustains 10% margins as it targets and as we predict, we see still greater upside to SEK 140 and beyond. As such, Volvo remains our top pick among the machinery and truck names, both near term and long term.”