Volvo AB: truckmaker offers up a trailer load of first-quarter profits

Volvo AB blasted a klaxon for investors on Wednesday.

The Swedish truck and heavy equipment maker announced surprisingly strong preliminary profits for the first three months of 2023. Full results arrive next week. Notably, operating margins for trucks and construction equipment hit record highs at 14.2 per cent and 18.3 per cent, respectively, exceeding analysts’ expectations. Volvo’s share price rose 8 per cent in response, lifting those of its peers in sympathy.

Closely tied to the economic cycle, truckmakers have steered a bumpy road of late. But as fears of a severe economic contraction have lessened, shares in European truck markets have rallied. Volvo shares were already up by a fifth over the past six months, in line with Daimler Truck though behind gains for Volkswagen spin-off Traton.

Volvo travels on a premium valuation, 11 times forward earnings versus an average of six times for the other two. That reflects 3 percentage points of higher operating margin at the Swedish company.

Longer term Volvo hopes to improve on that through a shift to electrification, which should lead to longer (and lower-cost) after-service contracts. It already marginally leads peers with 2,700 medium and heavy fully electric truck orders last year, having delivered more electric trucks than Daimler Truck or Traton.

An economic contraction would certainly test hopes of Volvo’s better financial resilience. Total European truck orders in the fourth quarter fell 12 per cent year on year for Volvo. This year the Swedish group’s truck orders might fall another 12 per cent, thinks Citi.

Even so, overland freight rates have held up better in Europe than the US, where they have returned to lows not seen since 2019. European industrial production has positively surprised so far this year.

In 2023 shareholders will shine the spotlights on operating margins, which dipped to 8 per cent in 2020. They will want to see higher trough margins this year, underscoring the importance of the first quarter data. Assuming Volvo can continue to deliver such resilient profitability that will justify investors paying a premium for its shares.