Volvo: EBIT Margin Expected To Increase 3x In 5 Years (OTCMKTS:VLVCY)

Introduction

Volvo Car (OTCPK:VLVOF) produces passenger cars under the Volvo and Polestar brand names. Volvo Car AB should not be dislocated with Volvo AB (OTCPK:VOLAF), under which the production of trucks, buses, marine engines and construction equipment
takes place.

Volvo’s luxury brands are a sought-after luxury item for many businessmen. The company foresees strong growth and is expected to increment EBIT margin from two.6% to 8% inside five years. The company is experiencing temporary headwinds from higher costs and reduced production due to component shortages. The temporary headwinds accept caused the share price to fall, which benefits investors looking to buy the stock cheaply. The stock’south valuation is very appealing, and growth expectations are high, making the stock a proficient buy.

Earnings Expectations Are Potent

Figures for the third quarter were mixed, as machine production was downward and costs were college. Despite these headwinds, Volvo expects strong need. Revenues in local currency (SEK) were xxx% college than the same catamenia last year. This was mainly due to favorable volumes, price/mix, exchange rates and joint venture contract product.

EBIT margin increased slightly to iii.5% from 2.1% concluding year. EBIT margin was highest in the second quarter of 2022, with an best high of xv.1%. Lower EBIT due to higher costs has driven the share toll downward, this presents a good ownership opportunity during these temporary headwinds.

Volvo has high-growth ambitions for the adjacent v years and aims for l% of cars sold to be fully electric. EBIT margin is expected to abound strongly to 8% to 10% (current EBIT margin = 3.5%). Need for Recharge cars is very loftier, but Volvo is facing a astringent shortage of parts to complete these cars. On average, a quarter of sales consist of Recharge Cars, and almost 7% of sales come from sales of fully electric cars. These high-growth ambitions are favorable for future share price growth.

Equally with all other automakers, margins are quite low; machine production is a capital-intensive process. Investors should therefore be wary of mediocre macroeconomic figures because the motorcar manufacturing industry is a volatile industry. Loftier overhead costs can cause significant losses. Nevertheless, Volvo has performed strongly in recent years. Volvo Car’ fiscal results for the past three years look skilful with positive free cash flows and net income.

One growth catalyst is the full acquisition of two Chinese joint ventures. Volvo Motorcar signed an agreement with parent company Geely Holding in 2021 to take over Geely Holding’s stake in the joint ventures in China. This will requite Volvo Machine full ownership of the automobile manufacturing plants and sales operations in China. The conquering of l% boosted shares in Daqing Volvo Car Manufacturing Co, Ltd and Shangai Volvo Automobile Research and Development Co. Ltd strengthens Volvo Machine’ position in People’s republic of china, its largest marketplace. It is a notable transaction considering Volvo Machine becomes the showtime major not-Chinese automaker to gain full control of its Chinese operations. Although the two joint ventures are already fully included in Volvo Car’s financial statements, their share of net income volition increase later the transaction.

Dividend Distribution

Volvo Auto offers a fluctuating dividend, and therefore the dividend payout ratio has likewise fluctuated widely in contempo years. It is difficult to get a clear picture of their future dividend payments. But what can exist said is that income investors volition not be satisfied with its widely fluctuating dividends; they expect a stable growing dividend. Volvo Automobile is thus interesting for investors who see the company’s share price rising. Therefore, it is a risky stock.

Valuation

Unfortunately, at that place is little information available from Volvo Motorcar to nautical chart its share valuation. Earnings per share in Dec 2021 are $ane.04. Currently, in the first half of 2022, earnings per share is $0.86.

Historically, the first one-half is the all-time twelvemonth for Volvo Car. 2021 H1 brought earnings per share of $0.77, while H2 brought earnings per share of $0.33. Therefore, I expect the second half of this twelvemonth to be 1 soft one. Presume that earnings per share remains the aforementioned at $one.04, so the PE ratio is 6.3. A very bonny valuation.

Investors should exist aware of over-the-counter stocks because the pinkish sail has low trading volume, information technology will be difficult for big investors to buy or sell a pregnant position. Low trading volume poses a take chances; investors may exist left with their shares for quite a long time considering in that location are few sellers in the OTC market. Investors should purchase the shares directly on the Swedish Stock Exchange. Investors volition have to commutation their currency for Swedish krona and taking into account currency risk.

Conclusion

Volvo Automobile expects EBIT margin to increase from two.6% to eight% in nearly v years. Temporary headwinds such as college costs related to reduced component deliveries lowered the EBIT margin. The share price reacted negatively to the news and fell. The cheap share price presents a buying opportunity as the visitor tries to increase sales and reduce costs. Volvo Car’south finances wait potent in contempo years, as net income and gratis cash flow remained positive. By and large, automakers operate on low margins considering of their capital-intensive operations. Overhead is high, which can lead to huge losses when macroeconomic figures are mediocre. Volvo Auto is doing quite well, as earnings and FCF remained positive during the corona crisis. The dividend payout fluctuates through the years, so this is non a stock favored past income investors. The stock’south valuation is favorable, and earnings are expected to rising over the next five years. Therefore, the stock is worth buying (on the Swedish stock commutation).