RBC upgrades Volvo to “outperform,” citing valuation and cyclical support

Investing.com -- RBC Capital Markets has upgraded Volvo AB (ST:VOLVb) to “outperform” from “sector perform” rating citing a more favorable risk-reward profile following a sell-off in the stock, in a note dated Tuesday. 

While acknowledging the ongoing macroeconomic volatility facing truck manufacturers, RBC believes several factors now support the investment case for Volvo, including its geographic exposure, cyclical positioning, financial strength, and valuation.

One key element in RBC's analysis is Volvo’s higher exposure to Europe compared to the U.S. Within its Trucks division, 49% of unit sales in 2024 were in Europe versus 26% in North America. In revenue terms, the split is 46% to 29%, respectively. 

Given the greater uncertainty in the U.S. economy and freight market, RBC sees Volvo's European tilt as a relative advantage.

RBC also notes that major parts of Volvo’s business have already been through extended downturns. 

The U.S. freight market, for instance, has been in recession for over two years, with profitability at a 14-year low, according to ACT. 

Meanwhile, Volvo’s Construction Equipment unit has seen three consecutive years of declining sales, with 2024 demand down 44% from 2021 and now at its lowest level since 2016. 

RBC believes these declines reduce the likelihood of further sharp corrections, in contrast to past cycles.

Financially, Volvo is entering this uncertain period from a position of strength. The company ended 2024 with SEK 85.9 billion in net industrial cash, equal to 1.2x EBITDA, a record level. 

As recently as 2016, the company was in a net debt position. RBC highlights this transformation as a key differentiator among cyclicals.

Valuation is another central component of the upgrade. Volvo shares currently trade at a forward P/E of 9.6x, well below their 10-year average of 12.4x.

RBC believes this discount already prices in the risk of moderate earnings downgrades, assuming no severe global downturn, which remains its base case. 

Although the brokerage has lowered its price target to SEK 295 from SEK 307 based on reduced 2025 earnings forecasts, the analysts see the current valuation as attractive.

In terms of Volvo's positioning, RBC remains constructive. In addition to electrification and e-commerce, the brokerage cites long-term growth opportunities in services.

By 2030, Volvo expects battery-electric vehicles to make up 35% of sales, with fuel cell electric vehicles making up 80% by 2040.

Services are projected to rise from 20% of sales today to 50% by 2030, helping to stabilize margins. 

Management maintains a long-term EBIT margin target of 10%, which RBC views as achievable given the shift toward less cyclical, higher-margin revenue streams.