2023-04-29 04:56:36 ET
Summary
- Volvo Group has seen strong growth in sales and overall earnings in the most recent quarter.
- Truck demand remains strong and production bottlenecks are showing signs of easing.
- I take a bullish view on Volvo Group.
Investment Thesis: I continue to take a bullish view on Volvo Group due to strong truck demand and an easing of production issues across the European market.
In a previous article back in January, I made the argument that Volvo Group (VOLAF) could see further upside ahead going forward - based on strong sales growth, continued growth in cash reserves and an attractive P/E ratio.
The stock has seen slight upside since then:
The purpose of this article is to investigate whether Volvo could have further scope to rise from here - taking recent earnings performance into consideration.
Performance
When looking at Q1 2023 results, we can see that Volvo Group's first quarter sales and earnings are up significantly on that of the same quarter last year - with net sales up by 24% and earnings per share up by 83%:
The strong growth across these metrics is encouraging. From a geographical standpoint, we can see that North America saw the strongest growth in sales on a percentage basis:
This is particularly welcoming, as it signifies that Volvo is performing strongly in the American market in spite of a modest market share within this geography relative to other regions:
Additionally, we can see that growth in orders was markedly higher across North America than that of other regions:
In this regard, performance in North America has been encouraging, and I take the view that a continuation of this trajectory could help the stock grow further from here.
The trucks segment as a whole is significant for Volvo Group - having accounted for over 70% of sales across Industrial Operations for Q1 2023 (including segments such as Buses, Construction Equipment, and Volvo Penta).
From a balance sheet standpoint, we can see that the quick ratio has remained constant over the last quarter at 0.56. Note that the quick ratio was calculated as total current assets less inventories all over total equity and liabilities less total equity.
Dec 2022 | Mar 2023 | |
Total current assets | 235,840 | 244,626 |
Inventories | 75,382 | 84,503 |
Total equity and liabilities | 431,771 | 443,505 |
Total equity | 147,439 | 158,951 |
Quick ratio | 0.56 | 0.56 |
Source: Figures sourced from Volvo Group: Report on the first quarter 2023. Quick ratio calculated by author.
Technically, a quick ratio below 1 indicates that a company does not have sufficient liquid assets to cover its current liabilities. However, given that Volvo operates in a capital intensive industry and is showing strong sales growth - I take the view that investors may be willing to overlook the company's quick ratio for as long as the same does not decline significantly more and sales growth continues to remain vibrant.
Risks and Looking Forward
As we have seen, sales growth for Volvo Group has continued to remain strong - particularly boosted by the trucks segment. Going forward, I take the view that the trajectory of growth for this segment will ultimately determine the extent to which Volvo Group can see further growth in its stock.
When looking at the stock's earnings trajectory, we can see that earnings per share (on a normalized diluted basis) continues to remain near a five-year high while the P/E ratio remains significantly below levels seen during 2021.
From this standpoint, I take the view that Volvo Group could still have scope for upside if sales and earnings growth continues to remain vibrant.
In my view, the main risk for Volvo Group at this time is if recessionary conditions cause truck demand to fall significantly - particularly with inflation placing upward pressure on prices. Volvo's truck demand could also see a plateau in growth if competition from companies such as Daimler Truck Holding ( DTRUY ) continues to accelerate.
With that being said, I am cautiously optimistic that truck demand can continue to thrive. The main reason for this is that in spite of higher prices, production to date has not been able to meet demand. This has meant that companies increasingly need to replenish their fleets - and are likely more amenable to paying higher prices for this reason.
Additionally, supply chain issues across the European market are reportedly starting to fade, and we could see a boost in sales as production starts to fill demand that previously could not have been catered for.
Conclusion
To conclude, Volvo Group has continued to see strong performance across the trucks segment and appears to be attractively valued based on its P/E ratio. I continue to take a bullish view on Volvo Group.
For further details see:
Volvo: Strong Truck Demand And Easing Production Pressures Encouraging