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Barclays launches Volvo AB at Equal Weight, favors Daimler Truck and Traton

Published 07/10/2024, 07:41 AM
© Reuters

Investing.com - Barclays has initiated coverage of Volvo AB (OTC:VLVLY) with an Equal Weight rating and a price target of SEK 300. The British investment bank acknowledged Volvo's reputation for quality and resilience in the European commercial vehicle sector in a note released on Wednesday but expressed concerns about the company's short-term growth prospects compared to its German competitors.

Barclays comments: "Volvo's lack of commitment in North America, its heavy reliance on a challenging EU30 market, and its limited self-help capabilities are not in its favor. Additionally, we believe the company has a relative disadvantage in terms of TSR (Total Shareholder Return) and valuation."

The Volvo Group is considered a benchmark in the EU commercial vehicle industry but faces challenges in the current macroeconomic environment, limiting the potential for significant stock outperformance. Barclays believes that "this is not enough in the current truck/macro environment to elevate the stock to the next level, especially compared to its German competitors."

Barclays highlights several factors influencing their preference for Daimler Truck (OTC:MBGAF) (with a price target of EUR 55) and Traton SE (ETR:8TRA) (with a price target of EUR 38) over Volvo. Key factors include "better valuation, low investor expectations confirmed by the recent stock price decline," and a persistent valuation gap between Volvo and its German rivals, with Daimler Truck trading at about a 25% discount and Traton at around 50% compared to Volvo.

A screening matrix developed by Barclays evaluates Daimler Truck and the Traton Group more favorably in several areas. Daimler Truck scores well in North America exposure, smart capital allocation, and Total Shareholder Return (TSR), while the Traton Group is highlighted for its self-help potential and corporate governance. In contrast, Volvo's high exposure to Europe and limited short-term self-help potential present a relative disadvantage.

Barclays also emphasizes the ongoing normalization of demand in key markets for both commercial vehicles and construction equipment, with Europe being more affected than North America. This aligns with Volvo's forecasts for 2024, predicting that the heavy-duty truck market in the EU30 will decrease by about 18% year-over-year to 280,000 units and the North American Class 8 truck market will decline by 12% to 290,000 units.

Despite these challenges, Barclays acknowledges Volvo's efforts to expand its presence in North America, including developing a new production facility in Mexico, expected to be operational by 2026. This initiative aims to increase Volvo's market share in the southwestern and western U.S. and Mexico, where the company is currently underrepresented, according to experts.

Although Barclays appreciates Volvo's strong earnings and cash resilience, stemming from a decentralized business model and lean cost structure, the bank remains skeptical about short-term catalysts for the stock. Therefore, Barclays prefers Daimler Trucks and the Traton Group over Volvo AB.

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