August 17, 2018 10:00 AM, EDT

Volvo May Be About to Surprise Its Investors, but in a Good Way

Volvo truck Volvo VNL by Volvo Trucks

The world’s second-biggest maker of trucks is about to increase its market value by about a fifth, if analyst estimates are to be believed.

Volvo AB, which can hardly keep up with orders, will probably enjoy rising demand for trucks through 2019, according to Graham Phillips, an analyst at Jefferies Group LLC. He says fears that Volvo is vulnerable to swings in the economic cycle are now playing too big a role in steering the share price.

The average of analyst estimates provided to Bloomberg shows that Volvo’s shares should gain 20.6% over the next 12 months. That’s the second-best return potential of all companies traded on the benchmark OMX Stockholm Index. It’s also roughly double Volvo’s historical average over the past decade.

Further to Go

“As long as the truck and construction-equipment markets remain stable to up, which is what we expect, we think there is room for further improvement,” Phillips said by phone. “The problem is that people have generally expected the markets, mainly the truck markets, to turn down again.”

Volvo rose as much as 1.4% on Aug. 17, making it one of the day’s best performers in Stockholm’s OMXS30 index.

Martin Lundstedt


Last quarter, Chief Executive Officer Martin Lundstedt managed to exceed Volvo’s profitability target for the first time ever after his rigorous program of cost cuts coincided with rising demand. The 51-year-old former Scania AB boss, who took over in late 2015, characterized demand as “solid” in the three months through June. He also increased sales to small customers and even pushed through higher prices.

Not since 2013 have there been as many analysts advising investors to buy Volvo shares, with 64% of recommendations urging clients to purchase stock in the Swedish company.

Johnson Imode and Mustafa Okur, analysts at Bloomberg Intelligence, say Volvo “is poised to report a record profit this year,” though they also see some likelihood management will inject a note of “caution” regarding 2019.

Volvo is now the fifth-highest rated stock on the OMX Stockholm Index, behind SSAB, Investor AB, Autoliv Inc. and AstraZeneca Plc. And only SSAB has a higher return potential.

But this year, Volvo shares have lost about 5%, which is worse than the benchmark index. Phillips at Jefferies says there’s every indication that demand for trucks will keep rising next year on the back of strong freight demand and healthy industrial production.

New environmental regulation and a relatively low penetration of trucks that meet the latest emissions standards could also help demand, as rig owners see the benefits of updating their fleets.

“A lot of these vehicles are not only meeting environmental standards, they’re also offering better fuel efficiency,” Phillips said. “The payback that a fleet operator is getting by buying a new vehicle is the best it’s been for a good few decades.”

If there’s a major downturn in industrial production or industrial activity, there would likely be a decline in truck sales, “but at the moment, we’re not seeing that,” he said.