2023-07-20 05:51:57 ET
Summary
- Volvo Group has seen a decrease in the cost of goods sold ratio - with sales growth outpacing that of the cost of sales.
- While net order intake was down this quarter, deliveries continued to see growth overall.
- I take a bullish view on Volvo Group stock.
Investment Thesis: I expect Volvo Group to continue to see upside from here, on the basis of a decrease in the cost of goods sold ratio as well as continued growth in deliveries across the Trucks segment.
In a previous article back in late April, I made the argument that Volvo Group ( VOLAF ) could see further upside from here, on the basis of strong truck demand as well as an easing of production issues across the European market.
Since then, the stock has ascended to a price of $21.23 at the time of writing:
The purpose of this article is to assess whether Volvo Group has the ability to see continued growth from here taking recent performance into consideration.
Performance
When looking at the most recent quarterly results for Volvo Group, we can see that net sales is up by 18% from that of the same quarter last year, with operating income up by 5% over the same period.
Volvo Group: Second Quarter 2023 Results
Additionally, earnings per share is up by 3% from SEK 5.14 to SEK 5.30 over the same period.
I had previously stated that in spite of a rebound in truck demand - one potential risk for Volvo at this time is upward pressure on production costs due to inflation potentially hindering profitability.
However, let us examine this in more detail. When looking at the cost of goods sold per quarter (calculated as cost of sales/net sales per quarter) - we can see that this ratio has actually fallen significantly in 2023:
Cost of goods sold ratio calculated by author using quarterly sales and cost of sales figures sourced from historical Volvo quarterly reports. Heatmap generated by author using Python's seaborn library.
With regards to short-term liquidity, we can see that the quick ratio of Volvo Group (calculated as total current assets less inventories all over total current liabilities) has decreased from that of the last quarter. Figures provided pertain to that of the Industrial Operations segment.
Dec 2022 | Mar 2023 | Jun 2023 | |
Total current assets | 235,840 | 244,626 | 243,555 |
Inventories | 75,382 | 84,503 | 92,939 |
Total equity and liabilities | 431,771 | 443,505 | 449,814 |
Total equity | 147,439 | 158,951 | 144,134 |
Quick ratio | 0.56 | 0.56 | 0.49 |
Source: Figures sourced from Volvo Group: Reports for the first and second quarters of 2023. Quick ratio calculated by author.
My Perspective
As regards my take on the above results and the implications for the growth trajectory of the stock going forward, the fact that the cost of goods sold ratio has been falling is highly encouraging - particularly given the inflationary pressures that Volvo Group has faced over the past year. Specifically, growth in sales has been outpacing growth in cost of sales - and this has meant that Volvo has been able to comfortably absorb increases in production costs given higher demand.
While the fall in the quick ratio means that the company is in a slightly less favourable position to service its current liabilities given its liquid assets - I do not see investors as being overly concerned about this given both the capital intensive nature of Volvo's business as well as the fact that growth in sales has been outpacing that of cost of sales.
It is notable that while the Trucks segment for Volvo Group saw an increase of 5% in deliveries, net order intake concurrently decreased by 10%. The increase in deliveries was driven by larger fleets continuing their replacement cycles, while the slowdown in order intake reflects the significant decline across the heavy-duty market.
Volvo Group: Second Quarter 2023 Results
However, the company has explained that as well as increased caution among customers - Volvo itself has also been more cautious with slotting orders, to alleviate the risk of not being able to meet demand. It is also notable that total order intake was up by 9% from that of the first six months of 2022.
In this regard, my overall view on Volvo is that the continued growth in sales and deliveries across the Trucks segment is highly encouraging - and I am particularly impressed that the cost of goods sold ratio has seen a decline in 2023 despite continued inflationary pressures - indicating that Volvo is managing its production costs quite well while concurrently seeing rising demand.
Risks and Looking Forward
Going forward, I take the view that Volvo Group is in a good position to continue seeing a rise in net sales while concurrently controlling its production costs to maintain profitability.
The main risk I see to the company at this time is a continued decline in net order intake for the Trucks segment - which would eventually be expected to impact delivery growth. Additionally, we have also seen that while total deliveries saw a 32% and 71% increase across the medium and light-duty segments - the same saw a decrease of 3% across the heavy-duty segment.
Given that the heavy-duty segment accounts for the majority of sales across the Trucks segment - a further decline in this regard could be concerning.
With that being said, the fact that Volvo itself has chosen to limit production in order to control costs has been a contributing factor to lower net order intake, and it is important to point out that total order intake for the first six months of this year was actually up versus the first six months of 2022.
To the second point, total deliveries across the heavy-duty segment were up by 2% over the first six months of this year as compared to 2022.
From this standpoint, I take the view that net order intake and deliveries has the capacity to grow longer-term.
When looking at Volvo's earnings trajectory - we see that earnings per share continues to remain near a five-year high while the P/E ratio remains significantly below that seen in 2021.
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Additionally, when comparing the P/E ratio to that of competitors Mercedes-Benz ( MBGAF ) and Ford Motor Company ( F ) - both of which compete significantly with Volvo in the Trucks segment - we can see that while Volvo's P/E ratio remains above that of Mercedes-Benz, we can see that it remains below that of Ford Motor Company.
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From this standpoint, given Volvo's strong presence in North America and continued growth in truck sales across the region - the stock could be trading at good value relative to domestic rivals such as Ford if we continue to see growth in sales.
Conclusion
To conclude, Volvo Group has seen continued growth in net sales and a decline in the cost of goods sold in spite of inflationary pressures. In spite of a drop in net order intake - I take the view that the company has the capacity to bolster both net orders and deliveries over the longer-term given its performance more broadly. For these reasons, I take a bullish view on Volvo Group.
For further details see:
Volvo: Lowered Direct Costs And Growth In Truck Deliveries Are Encouraging