VLVOF - Volvo Car Group Plans To Improve BEV Margins

2023-08-02 09:37:10 ET

Summary

• Volvo Car Group is focusing on electrification and improving their battery electric vehicle efforts to increase gross margins.
• The 2Q23 gross margin for BEVs was only 3%, but the company plans to address this issue with new BEVs built on a better platform with newer technology and higher range.
• Volvo Car Group's valuation range is estimated to be $15.4 billion to $19.2 billion, and the current market cap is $14.8 billion, making the stock a potential buy for long-term investors.

Introduction

As my June article says, electrification is being taken seriously at Volvo Car Group ( VLVOF ) ( VLVCY ). My thesis is that they are making improvements with their battery electric vehicle ("BEV") efforts such that gross margins will rise.

At the time of this writing, SEK100 is about $9.44.

The Numbers

The 2Q23 presentation shows a gross margin of just 3% for BEVs in 2Q23:

We can assuage ourselves by knowing the 3% gross margin for BEVs in 2Q23 is a fixable issue. The first problem is that lithium and other raw materials used for the 2Q23 vehicles were sourced at peak prices in 2022. The second issue is that these vehicles were built with old tech such that there are inefficiencies and little in the way of pricing power. They have new BEVs coming out soon like the EX30 and the EX90 that are built on a better platform with newer tech and batteries with a higher range such that pricing power will come into play.

Volvo Car Group continues to step up their efforts with BEVs as they go out of their way to show how buying habits are changing in markets around the globe:

Per the 2Q23 report , BEVs and PHEVs have been a high percentage of sales for Volvo Car Group the last three quarters:

CEO Jim Rowan had good things to say about the upcoming EX30 model at about the 30-minute mark of the 2Q23 webcast. The starting price of $35 thousand should be attractive to buyers seeing as it is a Volvo full of new tech with a range of about 480 km. Unlike previous Volvo BEVs that were built on hybrid platforms, the EX30 is built on a new BEV-specific platform with numerous efficiencies such that the price to consumers will be low and Volvo Car Group still expects gross margins of 15-20%.

TechCrunch notes that the EX30 will face some challenges in the US, but there are many markets in the world where I think it will do well:

The EX30 will be made in China. That means it won't be eligible for any U.S. tax credits and that it's subject to a 27.5% tariff on Chinese-made vehicles - making that price tag even more impressive.

Valuation

Per the 2Q23 report and the 2022 annual report , trailing twelve month ("TTM") EBIT not including share of income in JVs and associates was SEK20.1 billion or SEK12.7 billion + SEK17.9 billion - SEK10.5 billion. This comes out to about $1.9 billion, and I think the part of Volvo Car not including Polestar is worth 6-8x this amount, which is about $11.4 to $15.2 billion. Note that if we add back restructuring costs, then this is SEK0.9 billion higher. Volvo Car Group also owns nearly half of Polestar ( PSNY ) whose market cap is about $9.7 billion. Maybe the market is optimistic about Polestar's valuation, but I think Volvo Car Group's interest is worth about $4 billion such that the total valuation range for Volvo Car Group is about $15.4 to $19.2 billion.

VLVCY has an August 1 share price of $9.94 and the ratio for this instrument is 2:1. As such, we divide the 2,979,524,179 weighted average number of diluted shares from the 2Q23 report in half and multiply by this share price to get a market cap of $14.8 billion.

The market cap is below my valuation range, and I think the stock is a buy for long-term investors.

Forward-looking investors should keep tabs on the production numbers for the EX30.

Disclaimer: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.

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