Volvo shares find strong support around SEK 160

Last week we saw a positive trend break in the European and Shanghai stock markets, but not quite yet in New York and Tokyo. The Nasdaq in particular continues to struggle with the agony of higher interest rates and the resulting valuation effects.

As share prices have dropped while corporate earnings have risen (9.1% in Q1 2022), the S&P500 P/E ratio of 16.6x has now fallen below not only the ten-year average of 18.5x but also the five-year average of 16.9x.

Despite US CPI figures in April 2022 coming in somewhat higher than anticipated on Thursday, May 12 (8.3 percent versus 8.1 percent per year), the US 10-year Treasury yield fell back somewhat during last week. The highest inflation level so far occurred last month (March 31) with an 8.5 percent annual increase. It could therefore be a break in the downward trend, albeit still at very high levels.

From a five-year perspective, the current change in treasury yield is still minor.

However, there is no turning point yet in the HYG ETF for US junk bonds yet. We argue that this is very important for the stock market sentiment, particularly in New York and US stock exchanges.

Strong fundamentals and cash in Volvo

Volvo reported a strong Q1 2022 result on 22 April, mainly driven by operating margins in the Trucks division that surprised positively. Price increases and improved product mix compensated for the supply chain disruptions that continued during the quarter.

Volvo reiterated its full-year forecast for truck sales, with the only decrease noted for the China market. But a strong European and North American truck market is expected to more than compensate for this. That the oil price has fallen back slightly from its peak shortly after the outbreak of the Ukrainian war should also be good for Volvo's customers, the transport companies.

Volvo has had to take impairments linked to closures in Russia of i.e. its Kaluga factory. However, the Group had net cash of about SEK 60 billion as of March 31, 2022, notwithstanding customer financing activities. This should provide greater resilience should the economy weaken in the future.

At current price levels, the Volvo share is valued at around SEK 160 per share, with a P/E of around 10 times LTM and just above P/E 8 times based on FY 2022 estimates. Another key ratio is EV/EBIT of some 7x LTM and around 6 times FY 2022 estimates. Given its cash position, Volvo has a dividend capacity including share buybacks equivalent to about 10% of today's market capitalization.

After falling to the SEK 160 level shortly after the outbreak of the Ukrainian war, Volvo shares made a rebound attempt to fall back towards the same level. Meanwhile, the stock has now held this bottom around the 160 SEK level for a little more than two months. So it looks like pretty strong support is forming here.

The full name for abbreviations used in the previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA100: 100-day moving average

MA200: 200-day moving average

MACD: Moving average convergence divergence