Volvo: more rocking than rolling

[kscarbel]

Financial Times / December 10, 2013

Restructurings need to progress. Shareholders and managements are frequently at odds about the pace of change, but if there is minimal sign that a company is moving towards defined goals, investors have every right to fret.

Sweden’s Volvo, one of the world’s biggest truckmakers, has been in that stalled situation. Chief executive Olof Persson moved into the driving seat in September 2011. Yet Volvo’s shares, at SKr85 (US$13), have gained less than 10 percent since and generally underperformed peers. Profitability has been volatile: in the first nine months of 2013 operating income before restructuring charges fell 60 percent year-on-year to US$965 million (6.3 billion Krona), as margins more than halved to just over 3 percent.

True, truck markets have been difficult for everyone, with Brazilian profits fading and European demand contracting. A slower mining market has also depressed sales in Volvo’s smaller construction equipment arm.

Mr Persson has set goals – an extra 3 percentage points of margin (or US$1.4 billlion of operating income on sales of US$45.9 billion) by end-2015. With that in mind, some recent changes in the asset portfolio look positive. The sale of Volvo Rents, the US construction equipment rental arm, to private equity for US$1.1 billion (7.2 billion Krona) on Tuesday removes a business that offered limited operating income benefits – it lost US$7.2 million (47 million Krona) in 2013’s first nine months – yet by its nature absorbed capital. Even better, the proceeds will offset outgoings – US$857 million (5.6 billion Krona) for a stake in the yet-to-be completed joint venture with China’s Dongfeng, and US$153 million (1 billion Krona) for Terex’s off-highway truck unit – helping to keep gearing within the target range.

But everything else has yet to be proved, and Volvo may not get much lift from core markets in Europe and Latin America until well into 2014. Its shares are on 16 times next year’s earnings consensus, falling to only 10 times the estimated 2015 figure. Even so, they may rev slowly.